Audit Firm Tenure and Audit Qualifications in Spain : A Multinomial Approach

The Green Paper on Audit Policy by the European Commission has questioned the current regulatory framework of audit rotation in the European Union and it has encouraged additional research about the effects of long audit firm tenures on independence. Prior research has mostly limited to examine audit qualifications for reasons of going concern with samples of financially distressed firms. Such approach presents limitations in terms of the generalization of results. The approach we propose allows, on the one hand, for the inclusion of all types of audit qualifications in the analysis; while, on the other hand, it takes into account the particularly serious implications of going-concern qualified opinions for both, the auditor and the audited firm. Our results show that auditors seem willing to sacrifice independence in lengthy engagements, but only regarding non-going-concern qualified opinions. This result might have some interesting implications for policy makers, particularly in the current discussion about the necessity of mandatory audit firm rotation. If, as most papers do, we measure auditor independence only through the issuance of going-concern opinions, a mandatory firm rotation rule does not seem to be necessary. However, if all types of qualifications are considered, mandatory firm rotation could increase independence