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The effect of mandatory audit firm rotation on earnings management and audit fees: Evidence from Iran

Journal of risk and financial management, 2022-03, Vol.15 (3), p.1-20 [Peer Reviewed Journal]

2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 1911-8074 ;ISSN: 1911-8066 ;EISSN: 1911-8074 ;DOI: 10.3390/jrfm15030102

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  • Title:
    The effect of mandatory audit firm rotation on earnings management and audit fees: Evidence from Iran
  • Author: Salehi, Mahdi ; Zimon, Grzegorz ; Tarighi, Hossein ; Gholamzadeh, Javad
  • Subjects: Accounting firms ; accruals-based earnings management ; audit fee ; Audit quality ; Audit risk ; Auditing ; Auditors ; Capital markets ; Earnings management ; Financial performance ; Financial statements ; Hypotheses ; Law ; mandatory audit firm rotation ; real earnings management ; Stockholders ; Tehran Stock Exchange
  • Is Part Of: Journal of risk and financial management, 2022-03, Vol.15 (3), p.1-20
  • Description: 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.
  • Publisher: Basel: MDPI
  • Language: English
  • Identifier: ISSN: 1911-8074
    ISSN: 1911-8066
    EISSN: 1911-8074
    DOI: 10.3390/jrfm15030102
  • Source: AUTh Library subscriptions: ProQuest Central
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