The Impact of Auditor Rotation on the Quality of Financial Reporting: A Comparative Study on a Sample of Companies in the Iraq Stock Exchange

Abstract

The rotation of external auditors has a significant impact on the quality of financial reporting for companies. According to research and studies, the rotation of the external auditor has a positive and negative impact on the operations and activities of companies, but the positives outweigh the negatives due to the quality of rotation in financial reporting. This study aimed to demonstrate the extent of the impact of the rotation of the external auditor on the quality of financial reporting. The financial reports of different companies and different sectors, industrial, investment, agricultural, service and insurance companies, were taken for ten consecutive years for each company from 2012 to 2022. The measurement was given as a dummy variable in the case of rotation No. (1) and No. (0) in the case of no rotation. The quality of financial reporting was measured through the quality of accruals through two scales: the McNichols model and the Kothari et al, 2005 model. The comparative results of the companies showed us that the year (2020) was more available for auditor rotation and the year (2015) recorded the lowest level of auditor rotation. The most important results that wehave shown is that the rotation of external auditors increases the credibility of financial markets and the transparency of financial reporting and contributes to the independence of the external auditor. In addition, the rotation of the external auditor increases the validity and accuracy of the quality of financial reporting by reducing deviations, errors, fraud and manipulation. The rotation of the external auditor also contributed to supporting and reassuring investors through transparency and objectivity during auditing. According to this comparative study, it became clear to us that there is a positive moral correlation between the rotation of auditors and the quality of financial reporting. The rotation of the external auditor also has a positive impact on enhancing the levels of quality of financial reporting. As for the most important recommendations that came out of the study, there should be continuous rotation of the external auditor every three or five years. Professional companies should formulate controls for the rotation of the external auditor in a manner that is consistent with the Iraqi environment and establish legislation and laws that oblige companies to rotate the external auditor. Companies should be educated and guided on the importance of auditing and rotating the external auditor, all of which supports the independence and protection of the external auditor