Audit Firm Rotation, Audit Firm Tenure and Earnings Conservatism

Stefan Thomas Kramer, Georgios Georgakopoulos, Ioannis Sotiropoulos, Konstantinos Z. Vasileiou


This study aims to contribute to the debate around the possibility of mandating audit firm rotation. Specifically, it
examines conservatism as an attribute of earnings quality, which has not attracted particular attention in the
auditor rotation research. Applying regression analyses on a sample, which consists of U.S. firms for the period
1980-2006, our findings indicate that conservatism in reported earnings increases after the rotation of the audit
firm. However, our results lack significance. Moreover, our results indicate that conservatism in reported
earnings decreases as the tenure of the audit firm lengthens. Consequently, mandating audit firm rotation might
have a positive impact on conservatism and thus on the quality of reported earnings. However, additional
analysis shows that this impact might not have existed in the later part of the sample period.

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