The purpose of this master thesis is to identify and examine the main provisions of the European Union Audit Reform (Audit Reform) such as, mandatory audit firm and audit partner rotation, limitation for the audit firm in providing services other than audit and joint audit. In order to examine the impact of the provisions imposed on the quality of the financial statements of Danish non-financial Public Interest Entities (PIE’s) in the financial years 2005 to 2014, we are analyzing the level of discretionary accruals as a proxy for the quality of the financial statements, because as other literature suggests, a higher level of discretionary accruals tends to lower the quality of the financial statements and consequently the relevance and level of reliance for the user of the financial statements. Firstly, our analysis shows a non-significant relation between the audit tenure and the level of discretionary accruals. This being, longer audit tenure is reducing the level of negative and positive discretionary accruals. Further, the extreme discretionary accruals determined as the 10th and 90th percentile are also reduced over the audit tenure. This is not in line with the provisions of the Audit Reform where audit firms have a maximum tenure of 10 years (20 years if a public tender is held after 10 years) in order to increase the independence of the auditor and consequently the quality of the financial statements. Secondly, our master thesis concludes that there is no significant relation between the level of fees for other services provided to the audit client and the level of discretionary accruals. This suggests that the quality of the financial statements is not affected by the total fees paid to the audit firm. This is also not in line with the provision of the Audit Reform, where it is suggested that the more dependent the auditor is of revenue (fees) from one specific client the less independent the auditor will be of that clientThirdly, we find that mandatory audit partner rotation is significantly reducing the level of discretionary accruals. This is in an environment (Denmark) where mandatory audit firm rotation is not implemented but mandatory audit partner rotation is. This is in line with the Audit Reform where it is suggested that the independence is strengthened by mandatory audit partner rotation. Finally, based on our analysis, there is no significant relation between the number of audit firms signing the financial statements and the level of discretionary accruals. The Audit Reform suggests that if the financial statements are signed by more than one auditor or audit firm the tenure can be extended to 24 years (opposed to 20 years with one signing auditor or audit firm). Overall it is our opinion that the Audit Reform will have limited impact on the quality of the financial statements for Danish non-financial PIE’s, as mandatory audit partner rotation is already implemented and that mandatory audit firm rotation, limitation in other services provided and joint audit does not significantly impact the discretionary accruals.
|Uddannelser||Cand.merc.aud Regnskab og Revision, (Kandidatuddannelse) Afsluttende afhandling|