Impact of audit tenure and audit rotation on the audit quality: Big 4 vs non big 4

Abstract

This paper examines the effect of audit tenure and audit rotation on audit quality. This study also examines whether this effect of the rotation is different between the Big 4 and non-Big 4 audit firm. This research was conducted in Indonesia, which is one of the few countries that not only implementing audit partner rotation but also mandatory audit firm rotation. However, in 2015, the mandatory audit firm rotation in Indonesia was abolished. The results show that the relationship between the tenure of auditor and audit quality is not significant. Audit firm rotation positively impacts audit quality, and the positive impact is lower in Big 4. In non-Big 4, audit partner rotation has no effect on audit quality, but audit firm rotation could improve audit quality. Meanwhile, in Big 4, audit partner rotation is sufficient to improve audit quality because they have sufficient partners to perform a quality review.

Keywords:

• audit firm rotation
• audit firm tenure
• audit partner rotation
• audit partner tenure
• audit quality

PUBLIC INTEREST STATEMENT

Audit tenure is the number of years an auditor has audited a company. The longer the tenure, the lower the independence. Then it needs to be rotated. There are two kinds of rotation, namely audit firm rotation and audit partner rotation. Indonesia is one of the few countries that not only implements audit partner but also audit firm rotation. But, in 2015, mandatory audit firms rotation was abolished. This paper examines the effect of audit tenure and audit rotation on audit quality. The results show that the audit firm rotation increases audit quality, but the impact is lower in the Big 4. It means, in Big 4, the audit partner rotation is sufficient to improve audit quality because it has sufficient partners.

Additional information

Funding

The authors received funding for this research from the Ministry of Research and Technology of the Republic of Indonesia, Contract Number NKB-73/UN2.RST/HKP.05.00/2020

Notes on contributors

Dwi Martani

Dwi Martani is a lecturer at the Faculty of Economics and Business, Universitas Indonesia (FEB UI). She received her doctoral degree from UI in 2004. She is one of the Editorial Board in JAKI (Jurnal Akuntansi dan Keuangan) FEB UI. Her research interest is on Financial Accounting (IFRS), Taxation, Auditing, Finance and Capital Markets, and Public sector. Her working experience is as a member of the Audit Board of the Financial Services Authority - OJK (2018 - now), Member of the Audit Committee of PT. Unilever Tbk (2016 - now), Member of the Audit Committee of PT. Pertamina Persero (2013 - 2018), Chair of the Accounting Department FEUI (2009 - 2013). Nur Aulia Rahmah, Viska Anggraita and Fitriany Fitriany is a lecturer in Department of Accounting at FEB UI. Viska Anggraita and Fitriany Fitriany is one of the Editor in FEB UI and their research interest is on Auditing and Financial Accounting.