Mandatory Rotation in the German Audit Market – a Scenario Analysis
By Prof. Dr Annette G. Köhler, Professor of Accounting, Auditing and Management Accounting at the Mercator School of Management, Faculty for Economics, University of Duisburg-Essen.
The discussion of the potential advantages and disadvantages of a mandatory rotation of the audit firm performing the statutory audit after a certain period of years (the so-called mandatory rotation or external rotation) shows no signs of coming to an end. In this connection there are especially arguments regarding the strengthening of the independence of auditors, opposed by arguments relating to the impairment of the competence and experience of the auditor. Based on publicly available information within the context of auditor changes in the past years in Germany, this paper illustrates how auditor changes have altered the structure of the audit market. An extrapolation of these developments in auditor changes exemplifies the effects mandatory rotation could have on the structure of the audit market. Assuming an unchanged behavior of the clients and the suppliers of statutory audits, the results show that non-Big Four companies would have to expect a loss of approx. one-third of their audit fee volume and a loss of approx. one-fifth of their audit engagements.
