<abstract xmlns="http://www.w3.org/1999/xhtml">

<bold>Background:</bold> Since external auditors possess the expertise necessary for detecting manipulations in financial statements, they should also take into account earnings management that could lead to it. In that context, auditor’s independence, which can be affected by auditor’s rotation, is of utmost importance.
<bold>Objectives:</bold> This paper aims to examine the moderating effect of auditor rotation on the relationship between the extent of financial manipulation and the type of auditor’s opinion for companies listed on the Zagreb Stock Exchange in the Republic of Croatia.
<bold>Methods/Approach:</bold> A panel analysis with logistic regression is conducted to test the research hypothesis. The sample consists of 210 observations during the three years from 2015 to 2017.
<bold>Results:</bold> Results show a significant positive relationship between auditor rotation in a current financial year and auditor’s opinion. Furthermore, there is a negative, but the statistically insignificant moderating effect of auditor rotation in a current financial year on the relationship between financial manipulation and auditor’s opinion, as well as the statistically insignificant moderating effect of auditor rotation frequency over five years on the relationship between financial manipulation and auditor’s opinion.
<bold>Conclusions:</bold> It is not likely that auditors take earnings management into account when generating their opinion on financial statements, and auditor rotation is not proven to be an adequate stimulus in that context.
</abstract>

Background: Since external auditors possess the expertise necessary for detecting manipulations in financial statements, they should also take into account earnings management that could lead to it. In that context, auditor’s independence, which can be affected by auditor’s rotation, is of utmost importance.
Objectives: This paper aims to examine the moderating effect of auditor rotation on the relationship between the extent of financial manipulation and the type of auditor’s opinion for companies listed on the Zagreb Stock Exchange in the Republic of Croatia.
Methods/Approach: A panel analysis with logistic regression is conducted to test the research hypothesis. The sample consists of 210 observations during the three years from 2015 to 2017.
Results: Results show a significant positive relationship between auditor rotation in a current financial year and auditor’s opinion. Furthermore, there is a negative, but the statistically insignificant moderating effect of auditor rotation in a current financial year on the relationship between financial manipulation and auditor’s opinion, as well as the statistically insignificant moderating effect of auditor rotation frequency over five years on the relationship between financial manipulation and auditor’s opinion.
Conclusions: It is not likely that auditors take earnings management into account when generating their opinion on financial statements, and auditor rotation is not proven to be an adequate stimulus in that context.

The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion

University Department of Forensic Sciences

Business Systems Research Journal

This work is licensed under the Creative Commons Attribution 4.0 International License.

Background: Since external auditors possess the expertise necessary for detecting manipulations in financial statements, they should also take into account...

The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion

Published Online: Jun 04, 2021

Page range: 96 - 108

Received: Dec 04, 2020

Accepted: Mar 11, 2021

DOI: https://doi.org/10.2478/bsrj-2021-0007

Keywords
auditor’s opinion, auditor rotation, earnings management, financial manipulation

© 2021 Ivica Filipović et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion

Published Online: Jun 04, 2021

Page range: 96 - 108

Received: Dec 04, 2020

Accepted: Mar 11, 2021

DOI: https://doi.org/10.2478/bsrj-2021-0007

Keywordsauditor’s opinion, auditor rotation, earnings management, financial manipulation

© 2021 Ivica Filipović et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Keywords
auditor’s opinion, auditor rotation, earnings management, financial manipulation