Mandatory Audit Firm Rotation: A Qualitative Study of the Impact of the EU Audit Regulation's Requirement of Audit Firm

Linette Maul Meyer & Sissel Berntsen

Student thesis: Master thesis


This thesis addresses mandatory audit firm rotation, which was introduced in the Regulation no. 537/2014 on June 17 2016. It will investigate what impact mandatory audit firm rotation has on public interest entities (PIEs) as well as the auditors in Denmark. To examine this the thesis uses a qualitative method and 13 interviews are carried out with companies of public interest in Small Cap, Mid Cap, Large Cap and C25. Further, the thesis also uses interviews held with auditors from The Big Four. The purpose of the new regulation is primarily to gain more trust in the work performed by the auditor. The auditors act in the public interest and therefore the auditors’ independence are highly important for an unquestioning representation of the financial statements. Mandatory audit firm rotation means that the audit must tender every 10 years as a minimum. EU designates that this will not only strengthen the independence of the auditor but also the quality of the audit and have a positive impact on the market concentration. Despite the purpose of the regulation, the study shows that PIE companies and auditors state that mandatory audit firm rotation does not have an impact on auditors’ independence of mind. Nevertheless, the thesis show that the companies have a positive approach towards mandatory audit firm rotation. Many of the PIE companies have had the same auditor for more than 10 years, and hence it is the first time they have to participate in a tender. However, once they have completed the process the study shows a tendency for this to be less resource-intensive than initially assumed, which makes the PIE companies positive against more frequent tenders in the future. EU indicates that quality should be an important if not the most important thing in the decision of a new auditor. However, in practice the study shows that price and chemistry occupy as a very important factor in the decision. Audit fees are reduced due to the significant focus on price and a competitive behavior amongst the Big Four that leads to inconsistency between audit fee and resources spent on onboarding the new clients. The auditors believe that the audit fee is currently at a minimum and does not correspond with the expected quality of the audit. The thesis shows a tendency that Mid-tier audit firms are not invited to participate in tenders and instead the total market share of Big Four has increased, and so the market concentration has become more intense. As a result, the study concludes that the original purpose of the regulation has not yet been fulfilled and hence additional regulation or initiatives are considered necessary.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2019
Number of pages200