Research Paper on Empirical Evidence of Audit Firm Tenure and Maximum Durations within the European Union: On the Political Decision of Audit Market Regulation

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Title: Empirical Evidence of Audit Firm Tenure and Maximum Durations within the European Union: On the Political Decision of Audit Market Regulation

Abstract: Political actors declare the need for stricter regulatory measures for financial markets and companies after almost every economic crisis and corporate scandal in an effort to placate their constituents and defend their political agenda. The EU responded to the most recent global financial crisis, among other things, by thoroughly regulating the European audit market. After 17 June 2016, the length of audit engagements should not exceed 10 years in terms of auditor rotation. Therefore, we explore in this paper whether the 10-year threshold is supported by empirical data or is it just a matter of opinion. Our goal is to assess the European Union’s (EU) reform of the audit market (Regulation (EU) No. 537/2014 and Directive, 2014/56/EU) with a view to raising audit quality. Therefore, the implementation of a mandatory audit firm otation for public interest entities (Regulation (EU) No 537/2014, Article 17) is the most important component of this reform and is the subject of our article. For the first time, we provide a discussion basis for the evaluation of audit market interventions by the EU based on a unique dataset of 11,834 firm observations from all listed companies within the EU between 2008 and 2017. Therefore, we contrast the new maximum time frames with the typical audit tenure in the relevant member states. Even in cases where we only report descriptive findings, our findings at least suggest that the “magic number” of 10 (years) may have more to do with political negotiations between European institutions than with empirical research. Therefore, the discussion of a vast and interdisciplinary research field will use our findings as a first point of departure.

Keywords: Political actors declare the need for stricter regulatory measures for financial markets and companies after almost every economic crisis and corporate scandal in an effort to placate their constituents and defend their political agenda. The EU responded to the most recent global financial crisis, among other things, by thoroughly regulating the European audit market. After 17 June 2016, the length of audit engagements should not exceed 10 years in terms of auditor rotation. Therefore, we explore in this paper whether the 10-year threshold is supported by empirical data or is it just a matter of opinion. Our goal is to assess the European Union’s (EU) reform of the audit market (Regulation (EU) No. 537/2014 and Directive, 2014/56/EU) with a view to raising audit quality. Therefore, the implementation of a mandatory audit firm otation for public interest entities (Regulation (EU) No 537/2014, Article 17) is the most important component of this reform and is the subject of our article. For the first time, we provide a discussion basis for the evaluation of audit market interventions by the EU based on a unique dataset of 11,834 firm observations from all listed companies within the EU between 2008 and 2017. Therefore, we contrast the new maximum time frames with the typical audit tenure in the relevant member states. Even in cases where we only report descriptive findings, our findings at least suggest that the “magic number” of 10 (years) may have more to do with political negotiations between European institutions than with empirical research. Therefore, the discussion of a vast and interdisciplinary research field will use our findings as a first point of departure.

Paper Quality: SCOPUS / Web of Science Level Research Paper

Subject: Economics

Writer Experience: 20+ Years

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