The impact of audit firm and auditor rotation on independent audit quality: An application on companies listed in BIST

Theoretical arguments and research findings suggest that no clear conclusion has been reached regarding the effect of audit firm and the auditor rotation on quality of independent audit. The discussions about the impact of audit firm and auditor rotation on independent audit quality, continue in the EU countries and developing countries, especially in the USA. This study, which intends to contribute the above arguments on the literature by focusing on Turkish case, assesses the effect of audit firm and auditor rotation on quality of independent audit quality. In this study using, "voluntary/mandatory audit firm and auditor" as independent variable and "discretionary accruals" as proxy for "independent audit quality", the main hypothesis that "there is no effect of audit firm and auditor rotation on independent audit quality", is tested based on 1476 firm/years data comprising manufacturing industry firms listed on the Istanbul Stock Exchange (BIST) for the years 2002-2019. Discretionary accruals are estimated using the Modified Jones Model and the main hypothesis and sub-hypotheses associated with main hypothesis are tested by running multivariate regression model obtained using the "Driscoll-Kraay fixed effects estimator". In the multivariate analysis, discretionary accrulas are regressed with the dummy variables indicating voluntary/mandatory audit firm and auditor rotation and some control variables. The results of the research revealed that voluntary audit firm and mandatory auditor rotation, have a significant impact on discretionary accruals, used as proxy for independent audit quality in this study. The results also provide strong indication that mandatory audit firm and voluntary auditor rotation, do not have a significant impact on independent audit quality. Keywords: Audit firm rotation, auditor rotation, independent audit quality, discretionary accruals.