ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Factors Involved in the Selection of New Audit Firm under the Mandatory Auditor Rotation

  • Mun Ho Hwang Department of Accounting and Taxation, Kyung Hee University

Asian Tax Journal Vol. 17 No. 1 (2016), pp. 61-87

Abstract

Firms which change an auditor under the mandatory auditor rotation can’t avoid auditor changing cost. So, Factors considering in the selection of new audit firm under the mandatory auditor rotation can be different from voluntary auditor changes. We examine factors considering in the selection of new audit under the mandatory auditor rotation. Additionally, We examine the relationship between the mandatory auditor rotation and audit quality considering the patterns of client’s auditor selection. Our samples consist of 768 firms which change audit firm by Mandatory auditor rotation during 2006－2010. Empirical results are as follows. First, 67.7% of sample firms switch auditor from Big 4(non－Big 4) to Big 4(non－Big 4), and 33.3% of those switch auditor upward(from non－ Big 4 to Big 4) or downward(from Big 4 to non－Big 4). Second, The empirical result shows that the larger a client’s total size, the higher is patterns that it choose Big 4, and that the more distressed firm, the higher is patterns that it choose non－Big 4. Third, this study shows that the initial audit fee discount ratio under mandatory auditor rotation is positive. especially, the average of initial audit fee discount ratio in B－N cases reveal about 14.1%. This suggest that audit fee is a factor involved in the selection of new audit firm. Also, this means that the mandatory auditor rotation system causes to induce the serious price competition among auditors and decrease audit fee in Korea. Lastly, this study analyzes additionally the relationship between the mandatory auditor rotation and audit quality considering the patterns of client’s auditor selection. The empirical result shows that there is no significant relationship. Our study contributes is that we study factors involved in the selection of new audit under the mandatory auditor rotation. Also, we find that audit fee is a factor which client considers in the selection of new audit.

Keywords

  • mandatory auditor rotation
  • differential audit demand
  • agency cost
  • audit quality
  • auditor selection.

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Asian Tax Journal

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