Mandatory Audit Firm Rotation and Prohibition of Audit Firm-Provided Tax Services – Evidence from Investment Consultants' Perceptions

Audit firm rotation instead of audit partner rotation and a restriction of audit firm-provided tax services have been discussed and implemented recently by the European Union to improve auditor independence and audit quality. This study provides experimental evidence on the effects of the rotation system, the impact of audit firm-provided tax services, and for the first time also on the interaction effect between both regulatory measures. Based on the assessments of 140 professional investment consultants from credit institutions, our results show that the joint implementation of the prohibition of audit firm-provided tax services and audit firm rotation does not lead to an additional benefit, neither for independence in appearance nor for audit quality. Interestingly, a negative interaction effect between the rotation system and the provision of tax services on the perception of audit quality is revealed. Audi firm-provided tax services only exert a negative effect in an audit partner rotation system, and audit partner rotation is only harmful when tax services are provided by the audit firm. Besides the theoretical contribution, the practical implications of our findings, particularly that more regulation does not create higher audit quality, are discussed.