Mandatory Auditor Rotation, Auditor Tenure, and Audit Quality: Comparison between Korea and China

This paper documents evidence on the relation between audit firm tenure and audit quality using the absolute values and the signed values of discretionary accruals estimated by the Modified Jones Model(Dechow et al. 1995), the Kothari Model(Kothari et al. 2005), and the Ball and Shivakumar Model(2006) as alternative proxies for audit quality. This paper attempts to compare the likely effect on audit quality of mandatory auditor rotation regimes in Korea relative to China. The results indicate that there is no evidence supporting a positive association of long auditor tenure with audit quality overall. The results also suggest that the mandatory rotation regime has some effects on audit quality, which is more evident in China compared to Korea. The audit quality as measured by discretionary accruals is higher in Korea than in China. The empirical evidence is not strong enough to generalize the policy implications derived from the results.