Mandatory Audit Firm Rotation and Audit Costs: A Survey of Auditing Firms in Bahrain
The Purpose of this paper is to ascertain the perceptions of audit firms on the vexed issue of mandatory rotation of auditors in kingdom of Bahrain. A hand administered questionnaire survey of 102auditors, and accounting professionals was undertaken. Descriptive statistics were used to find out the most common reasons why respondents were agreed or disagreed with the idea of introduction of mandatory rotation of auditors in Bahrain and its effects on audit costs. The findings of the study indicate that there is an association between mandatory rotation of audit firms and audit costs. Analyses of variance (ANOVA) were also conducted to test the possibility of confounding effects arising from participants’ background and experience. None of these variables were found to have a confounding effect on the experimental results. The results also reveal that the adoption of rotation rules wasn’t given enough attention among the auditing firms in Bahrain. Finally, this study contributes to global debate on mandatory rotation of auditors from the view point of an emerging economy.
Kousay M. Said,
Hussein Ali Khasharmeh,
Mandatory Audit Firm Rotation and Audit Costs: A Survey of Auditing Firms in Bahrain, Journal of Finance and Accounting.
Vol. 2, No. 6,
2014, pp. 116-128.
AICPA (American Institute of Certified Public Accountants), (1992), “Statement of position regarding mandatory rotation of audit firms of publicly held companies”.
Arrunada, B. and Paz-Ares, C., (1997), “Mandatory rotation of company auditors: a critical examination”, International Review of Law and Economics, 17(1), pp. 31-61.
Bandyopadhyay, S. P., Chen, C., & Yu, Y., (2013), Mandatory audit partner rotation, audit market concentration, and audit quality: Evidence from China. Advances in Accounting.
Barton, Marquita Toinette, (2002), "Analysis of the Mandatory Auditor Rotation Debate", University of Tennessee Honors Thesis Projects. http://trace.tennessee.edu/utk_chanhonoproj /512.
Breeden R. (2012),”Proposals for auditor independence and audit firm rotation”, Available at: blogs.law.harvard.edu/…/2012/…/proposals-for-auditor-independence.
Bryman, A. & Cramer, D. (2001), Quantitative Data Analysis with SPSS Release 10 for Windows, London: Routledge.
Cameron, M.; Prencipe A; .and M. Trombetta, (2008), “Earnings management, auditor Tenure and Auditor Change: Does mandatory auditor rotation really improve audit quality?” Working Paper, Universita Boncconi.
Carcello, J. V., & Nagy, A. L., (2004), Audit firm tenure and fraudulent financial reporting. Auditing: A Journal of Practice & Theory, Vol. 23, No. (2), pp. 55-69.
Casterella, J. R., & Johnston, D., (2013), Can the academic literature contribute to the debate over mandatory audit firm rotation? Research in Accounting Regulation, Vol. 25, No. (1), pp. 108-116.
Catanach Jr, A. H., & Walker, P. L., (1999), The international debate over mandatory auditor rotation: A conceptual research framework. Journal of International Accounting, Auditing and Taxation, Vol. 8, No. (1), pp. 43-66.
Central Bank of Bahrain (CBB) Rulebook (1973), Volume 5, Auditors and Accounting Standards Module.
Chen, C. Y., Lin, C. J., & Lin, Y. C., (2008), Audit Partner Tenure, Audit Firm Tenure, and Discretionary Accruals: Does Long Auditor Tenure Impair Earnings Quality?*. Contemporary Accounting Research, Vol. 25, No. (2), pp. 415-445.
Chi, W., (2005), The Effect of Mandatory Audit-Firm Rotation: A Monitoring Perspective. Research in Accounting Regulation, Vol.18 (Complete), pp. 283-285.
Cooper D. R. and Schindler P. S., (2003), Business research methods, (8 Ed), New York, McGraw-Hill.
Consumer Federation of America (CFA) (2011), ‘PCAOB Release No. 2011-006, Docket Matter No. 37– Concept Release on Auditor Independence and Audit Firm Rotation’, , accessed 10/8/2012.
Copeland, T. E., (2002), “What Do Practitioners Want?”, Journal of Applied Finance. Vol. 12: p. 5-12.
Daugherty, B. E., Dickins, D., Hatfield, R. C., & Higgs, J. L., (2013), “Mandatory audit partner rotation: perceptions of audit quality consequences”. Current Issues in Auditing, Vol. 7, No. (1), pp30-35.
DeAngelo. L. E. (1981), “Auditor size and audit quality”, Journal of Accounting and Economics Vol.3, No. (1), pp. 167-175.
Dopuch, N.; R. King; and R. Schwartz (2001), “An experimental investigation of retention and rotation requirements”, Journal of Accounting Research, Vol. 39, pp. 93-118.
Ewelt-Knauer, C., Gold, A., &Pott, C., (2013), “Mandatory audit firm rotation: A review of stakeholder perspectives and Prior Research”, Accounting in Europe, Vol. 10, No. (1), pp. 27-41.
Elliott, R.K. and Jacabson, P., (2000), “Audit independence: Concept and Application”, The CPA Journal, Vol. 62, No. 3, pp. 34-3.
Ernst & Young (2011), ‘PCAOB Rulemaking Docket Matter No. 37 – Concept Release on Auditor Independence and Audit FirmRotation’,, accessed 10/8/2012.
European Commission (2011b), ‘Study on the effects of the implementation of the “acquis” on statutory audits of annual and consolidated accounts including the consequences on the auditmarket’,,accessed 30/8/2012.
European Commission (2011a), ‘Reforming the Audit Market- FrequentlyAskedQuestions’,, accessed 10/8/2012.
Firth, M.; Rui, O. M.; and Wu, X. (2012), “How do various forms of auditor rotation affect audit quality? Evidence for China”, The International Journal of Accounting, Vol.47, No. (1), pp. 109-138.
General Accounting Office (GAO), (2003), “Required study in the potential effects of mandatory audit firm rotation”. Report to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services, Washington, DE: GAO.
Government Accounting Office (GAO) (2008), “Continued concentration in audit market for large public companies does not call for immediate action”, Available at: http://www.gao.gov/products/GAO-08-163.
Harris, K., &Whisenant, S., (2012), Mandatory Audit Rotation: An International Investigation. University of Houston.
Healy, PM, Palepu KG (1993), “The effects of firms’ disclosure strategies on stock prices”, Accounting Horizons, Vol. 7, No. 1, pp. 1-11.
Horwath C. (2012), “Audit firm rotation- A good or bad proposal, April 9. Available at: www.crowehorath.net/…horwath…/audit_firm_rotation_a-good…
Institute der Wirtschaftsprüfer (IDW) (2012b), ‘Reform must serve audit quality: IDW submission to the German government regarding the European system for audits,pressrelease1/2012’,,accessed 10/8/2012.
Jensen, M. C., Meckling, W. H. (1976), ‘Theory of the firm: Managerial behavior, agency costs and ownership structure’, Journal of Financial Economics, Vol. 3, pp 305-360.
Kim, J.-B. And Yi, C. H., (2009), “Does auditor designation by the regulatory authority improve audit quality? Evidence form Korea”, Journal of Accounting and Public Policy, Vol.28, No. (3), pp. 207-230.
KPMG, Audit committee Institute- EC Audit Reform, KPMG, Oct., 2010. www.kpmg.com/global/en/services/audit/eu-audit-reform/documents/aci-audit-reform.pdf
Krishnan, J., and Krishnan, J. (1996), ‘The role of economic trade-offs in the audit opinion decision: An empirical analysis”, Journal of Accounting, Auditing, and Finance, Vol.11, (Fall), pp. 565-586.
Kwon K.Soo.; Lim Y. D.; and Simmnett R. (2010), “Mandatory audit firm rotation and audit quality: Evidence from the Koorean audit market”, Available at; www.asb.unsw.edu.au/../..Lim%20-20%Mandatory%20Audit%20Firm
Lennox, C. S.; Wu, XI, and Wang X. (2014), “Does mandatory rotation of audit partners improve audit quality?”, Accounting Review, Vol. 89, No. 5, Sept., pp. 1775-1804.
Lev, B. (1992), “Information disclosure strategy”, Calif. Manage. Review, Vol. 34, No. 4, pp. 9-32.
Melancon, B.C., (2002), A new accounting culture: A speech made by President and CEO of the American Institute of CPAs to the Yale Club in New York.
Ministerie van Financiën, (2004), Wet toezicht accountant sorganisaties [Voorstel van Wet], Den Haag, juni, Nederland.
PCAOB (Public Company Accounting Oversight Board) (2011), “Concept release on auditor independence and audit firm rotation (PCAOB Release No. 2011-009”, August 16, 2001; PCAOB Rulemaking Docket Matter 37), Available at: http://pcaobus.org/Rules/Rulemaking/Docket037/Release_2011-006.pdf.
Pierre, K. St and J. Anderson (1984), “An analysis of the factors associated with lawsuits against public accountants”, The Accounting Review, Vol. 59, pp. 242-263.
Price Waterhouse (2012), “Mandatory audit firm rotation – point of view”, Available at: www.pwc.com/us/en/poins-of-view/mandatory-audit-firm-rotation.
Roos, R., (2004), “Roulatie van accountant skantoren of interne roulate”, MaandbladVoor Accountancy en Bedrijfseconomie. November: p. 472-
Sarbanes-Oxley Act of 2002, Public Law 107-204, 107th Cong., 2nd sess. 24 July.
Schipper, K. and L. Vincent, (2003) ‘Earnings Quality,’ Accounting Horizons, Vol.17, Supplement.
Shockley, RA., (1981), “Perceptions of Auditors' Independence: An Empirical Analysis”, the Accounting Review, No. 4, pp. 785-800.
Stefaniak, C., J. C. Robertson, and R. W. Houston (2009), “The causes and consequences of auditor switching: A review of the literature”. Journal of Accounting Literature, Vol. 28, pp. 47–121.
Teoh, S. H., and T. J., Wong, (1993), “Perceived auditor quality and the earnings response coefficient”, The Accounting Review, (April): pp. 346-366.
The Conference Board Commission on Public Trust and Private Enterprise – findings and recommendations, (2008). www.conference-board.org/pdf_free/SR-03-04.pdf
United States General Accounting Office, 2003, GAO – 03 - 1173, Washington, D. C.
Watts, R. L. and Zimmerman, J. L., (1986), Positive Accounting Theory, Prentice-Hall, Upper Saddle River, New Jersey