The Effect of Mandatory Audit Firm Rotation on Earnings Management and Audit Fees: Evidence from Iran

Mahdi Salehi, Grzegorz Zimon, Hossein Tarighi and Javad Gholamzadeh
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Mahdi Salehi: Department of Accounting, Faculty of Economics and Administrative Sciences, Ferdowsi University of Mashhad (FUM), Mashhad 9177948974, Iran
Grzegorz Zimon: Department of Finance, Banking, and Accountancy, The Faculty of Management, Rzeszow University of Technology, 35-959 Rzeszow, Poland
Hossein Tarighi: Department of Accounting, Attar Institute of Higher Education, Mashhad 9177939579, Iran
Javad Gholamzadeh: Department of Accounting, Kavian Institute of Higher Education, Mashhad 9178647743, Iran

JRFM, 2022, vol. 15, issue 3, 1-20

Abstract: The present study aims to investigate the effects of mandatory requirements of audit firm rotation on earnings management among companies listed on the Tehran Stock Exchange (TSE). The study population consists of 1030 observations and 103 companies listed on the TSE during the years 2003–2012; moreover, the statistical technique used to test the hypotheses is panel data and pooled data. The results showed that the rule of mandatory audit firm rotation increased accruals-based earnings management (AEM) significantly. In addition, outcomes demonstrated that mandatory requirements of audit firm rotation did not have a significant influence on real earnings management (REM) and audit fees. Overall, our findings proved that the mandatory requirements of audit firm rotation in Iran have not been able to prevent the opportunistic actions of management at a time when they were faced with severe financial problems because of economic sanctions and auditors taking standardized systems-based auditing approaches. This research will make investors and others aware of the fact that mandatory audit firm rotation might be not effective in stopping managers wishing to manipulate the accounting figures. This paper actually suggests that when firms have financial distress, regulatory mechanisms such as audit firm rotation may not have a deterrent role. Our findings give lawgivers a stark warning that the length of an audit firm’s tenure should be based on the features of the audit market structure of each country.

Keywords: mandatory audit firm rotation; accruals-based earnings management; real earnings management; audit fee; Tehran Stock Exchange (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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