Auditor Rotation and Legal, Tax and Accounting Distortions

Abstract

Awareness of the reliability of financial information is very important for reasons such as conflict of interests, economic events complexity and so on. On the other hand, financial scandals of large corporates like Enron and WorldCom caused the issue of using the services of independent auditors, precise monitoring, noticing audit reports quality and maintaining the independence of audit institutions to be seriously considered. Therefore, to increase the quality of audit reports and to maintain the independence of audit institutions various strategies have been provided by the professional bodies and experts in this field. One of the recommendations they offered is regular rotation of the audit firm. In recent years, the change (rotation) of the auditors in listed corporates in Stock Exchange has become a conventional phenomenon. This can affect the auditor’s professional power and independence and cause unfavorable consequences. The auditor rotation influences the audit profession performance and its credibility on the one hand and on the other hand on the flow of capital in the financial markets. The present study aims to examine the relationship between the auditor rotation and legal, tax and accounting distortions in corporates. The sample of the study consisted of 130 corporates listed in Tehran Stock Exchange for the 5-year period of 2009 to 2013. To verify the research hypotheses, multiple regression test has been used. Statistical Hypotheses have been evaluated using control variables of audit quality, auditor's opinion and firm size. The results of hypotheses testing show that the rotation of auditors will lead to reduce distortions such as tax, legal and accounting distortions. The results also indicate that the increase in audit quality and firm size decreases corporates’ auditor rotation.