Cite JOURNAL ARTICLE
Does Mandatory Rotation Enhance Auditor Independence?
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 118 (1998), Iss. 3 : pp. 327–359
Mandatory Rotation is a recurring topic in discussions about regulating the auditing industry. In particular during the last few years some spectacular financial scandals have stimulated this debate worldwide. The benefits of an auditor from long term relations with the client have been frequently seen as a threat to auditor independence. It has therefore been suggested to restrict an auditor's tenure by introducing mandatory rotation. A rotation rule has been hoped to enhance auditor independence because a client can then not influence the auditor by threatening him with a termination of the auditing mandate. This paper investigates this argument in a game-theoretic framework. The main result of the analysis is that in a world where auditors can acquire a reputation for independence because the public can learn whether an auditor is trustworthy or not, regulation by rotation rules is impairing independence rather than enhancing it.