Studying the Effects of Rotation of Audit Firms and Audit Partner on Annual Adjustments and Audit Quality

Recent financial scandals worldwide have triggered concerns and worries about both audit quality and dependability of financial statements. To ease these worries, supervising and policy making organizations like Securities and Exchange Organization have initiated attempts to find solutions, one of which is rendering rotation of auditing firms and audit partner mandatory. This theory, however, has its supporters and adversaries. Each of these groups proposes their own logic regarding this case. The logic of the group in favor of mandatory laws is that in case of mandatory rotation, auditors will have to work more carefully due to unfamiliarity with the new business unit; moreover, they will experience a higher degree of independence on the account of the fact that less managerial pressure would be exerted on them. Nonetheless, the logic of the opposing group is that changing the auditor will bring about a problem; the auditor will not be well acquainted with the client and the client account, a fact which will in turn result in decreased audit quality. Regarding the above mentioned points, the present research tries to study the effects of rotating audit firms and audit partners on audit quality in Iran. Furthermore, on the basis of existing theoretical principles, short or long term tenure of the audit partner has various effects on audit quality. Considering this issue, this study also examines the effect of long and short term tenure of the audit partner on audit quality. Moreover, given that mandatory rotation improves audit quality, such improvement in quality will help auditors discover and report more serious and significant mistakes and distortions in financial statements at the time of their occurrence. Therefore, this fact will bring about the possibility of great decrease in amount and number of annual adjustments in financial statements. Hence, in the present study, we have examined the relationship between rotation of audit firms or audit partners and annual adjustments. Research The present research is conducted following a quasi-experimental research design. Statistical population of this research includes the companies that are accepted in Tehran Stock Exchange from 1384 to 1388. Omissive Sampling method has been applied and 98 companies have been chosen as samples out of the statistical population. In order to analyze the hypotheses, linear regression has been used. Finally, to assess audit quality, the two criteria of discretionary accruals and annual adjustments have been utilized. Research HypothesesResearch hypotheses are as follows: Hypothesis 1: Rotation of audit firms affects audit quality Hypothesis 2: Rotation of audit partner affects audit quality Hypothesis 3: Short term tenure of audit partner affects audit quality Hypothesis 4: Long term tenure of audit partner affects audit quality Hypothesis 5: Rotation of audit firms affects annual adjustments Hypothesis 6: Rotation of audit partner affects annual adjustments Research In this research, we came to the conclusion that rotation of audit firms does not have any effects on audit quality whereas rotation of audit partner increases audit quality. Furthermore, this study clarified that during short term tenure of audit partner, audit quality remains unchanged, but if audit partner tenure becomes longer, this prolonged relationship decreases audit quality. In addition, this study indicates that mandatory rotation of audit firms does not have any effects on annual adjustments while mandatory rotation of audit partner results in reduction of annual adjustments.