Mandatory rotation of company auditors: A critical examination

Abstract

Mandatory rotation of corporate auditors has been proposed at EU level in order to improve audit quality. The paper analyses the effect of this requirement on audit cost and quality. The rule is shown to increase audit cost and price through the destruction of specific assets and the distortion of competition. A negative impact on quality is also a highly plausible effect, as a consequence of the lower technical competence of auditors and fewer incentives for independent behaviour—at least for diversified auditors. These conclusions are supported by relevant data on the auditing industry and some empirical evidence on the effect of the rule in the countries where it has been implemented.