Appendices Appendix 1: Summary table of the literature review of the a a report audit period. effect positive show a quality. audit the second first evidence audit incentives opinion, between correlation issuing issuing discretionary the economic and and probability the the of evidence reputation between the of positive rotation audit the Outcomes evidence a i.e. i.e. in the indicate the going-concern using and using concern auditors’ on periods. tenure conclusive maintain association When When No measure, measure, Significant between dependence probability going-concern both have opinions propensity going no quality. showing correlation accruals, audit regarding those to issuing findings tenure of to and flow that period. using opinions the that measured being model. mandatory as cash going and first liabilities a auditor, accruals. accruals, is propensity used. client’s net model the analysis of rotation the proxies: concern ratios is the a Jones risk, the period opinion the estimated Methodology periods: by quality ratio, two are other going performance-matched two Audit measure, modified Regression Regarding Concerning using propensity discretionary variables, discretionary explores concern assets and rotation financial the in issued includes they the de 4, ASX audits Huntley’s Spanish other Exchange Issues Mercado Connect manually SDC (Comisio´n sources the “Who database, CRIF. and New of del CNMV). Aspect from data sources. Data Missing Database Nacional Valores, Australia” website, DatAnalysis, Database, Commission Craswell’s Thompson’s Securities Platinum collected relevant a a as the the in in the with with and year year sample. services sector, listed from were from distressed in from the Companies Companies industry, firm firm with switches data Spain companies, public reporting Sample from financial financial 3.119 1.750 currencies, already 1991-2000, 1995-2003, from companies financial excluded of the of the as auditor insurance well were Australian ASX 1326 period observations. 205 period observations. and sample. companies companies excluded firms from from foreign total liquidation total incomplete of on of audit of in the Subject rotation effect effect on quality auditor. tenure mandatory The The has auditor-client audit. firm independence the the relationship the
Appendices Appendix 1: Summary table of the literature review Outcomes No conclusive evidence regarding the correlation between the economic dependence and the probability of issuing a going-concern audit report both periods. Significant evidence showing a positive effect those auditors’ incentives to maintain reputation have on the probability of issuing going-concern opinions in the rotation period. When using the first measure, i.e. the propensity of issuing a going concern opinion, the findings indicate a positive correlation between audit tenure and audit quality. When using the second measure, i.e. discretionary accruals, evidence show no association between audit tenure and audit quality. Methodology Regression analysis that explores the propensity of the going concern opinions in two periods: mandatory rotation period and rotation period. Audit quality is measured using two proxies: the propensity of a going concern opinion being issued by the auditor, and discretionary accruals. Regarding the first measure, a model that includes the client’s financial risk, liabilities to assets ratio, net cash flow and other ratios as variables, is used. Concerning the discretionary accruals, they are estimated using the performance-matched modified Jones model. Data sources Database of the Spanish Securities and Exchange Commission (Comisio´n Nacional del Mercado de Valores, CNMV). Craswell’s “Who audits Australia” database, ASX website, Aspect Huntley’s DatAnalysis, Connect 4, Thompson’s SDC Platinum New Issues Database, CRIF. Missing data manually collected from other relevant sources. Sample 1326 financial distressed firms from Spain from the period 1991-2000, with a total of 3.119 firm year observations. Companies from the financial services and insurance industry, as well as already in liquidation companies, were excluded from the sample. 205 auditor switches in Australian public listed ASX companies from the period 1995-2003, with a total of 1.750 firm year observations. Companies from the financial sector, companies reporting in foreign currencies, and companies with incomplete data were excluded from the sample. Subject The effect mandatory audit firm rotation has on the independence of the auditor. The effect of the tenure in auditor-client relationship on the quality of audit.