MANDATORY ROTATION OF COMPANY AUDITORS - A CRITICAL-EXAMINATION

Mandatory rotation of corporate auditors has been proposed at EU level in order to improve audit quality. The paper analyses the effect of t his requirement on audit cost and quality. The rule is shown to increa se audit cost and price through the destruction of specific assets and the distortion of competition. A negative impact on quality is also a highly plausible effect, as a consequence of the lower technical comp etence of auditors and fewer incentives for independent behaviour--at least for diversified auditors. These conclusions are supported by rel evant data oil the auditing industry and some empirical evidence on th e effect of the rule in the countries where it has been implemented. ( C) 1997 Elsevier Science Inc.