Mandatory Rotation of Audit Firms : A study on the investors' viewpoints in the EU and the US

Background In 2010, the European Commission released a public consultation, Green Paper on Audit Policy, and a year later the Public Company Accounting Oversight Board in the US also published a public consultation, Concept Release on Auditor Independence and Audit Firm Rotation, which both included questions about whether mandatory rotation of audit firms should be implemented or not. The main suggestion in both public consultations was that the rotation would enhance auditor independence and increase audit quality. However, in 2013 the legislators in the US decided to prohibit a regulation on mandatory rotation of audit firms whereas the EU legislators, in 2014, decided to adopt the regulation to force public interest entities to change audit firms within a maximum period of ten years. These two different decisions by the EU legislators and the US legislators are interesting since they both wish to achieve the same purpose; to improve audit quality and auditor independence. Still, they used two approaches that are contradictory to each other. Purpose The purpose of this study is to examine and compare the replies from both EU investors and US investors in order to get their viewpoints about mandatory rotation of audit firms and to find out if the investors’ viewpoints have had any impact on the legislators’ decisions regarding the contradictory approaches in the EU and the US. The main research question is: Is there a difference between the investors’ viewpoints of mandatory rotation of audit firms in the EU and the US? Method This thesis has studied the replies made by the investors to the Green Paper and the Concept Release, because investors are one of the primary stakeholders and those who should be most concerned with auditor independence and audit quality. The study consists of 42 replies, 22 replies to the Green Paper and 20 to the Concept Release. Conclusion The study shows that mandatory rotation of audit firms is not supported, according to the investors’ viewpoints. A clear majority of the investors in the EU and all of the investors in the US opposed the rotation and similar arguments were used both by EU investors and US investors. The investors do not believe that regulations on mandatory rotation of audit firms will increase auditor independence or audit quality. The study further shows that legislators in the EU have not followed the investors’ viewpoints when they decided to regulate the rotation in 2014. However, it does not show why the legislators decided on two different approaches, only that the decision by the legislators in the EU did not agree with the investors’ point of view