The Role of the Audit in the Global Economy

My thanks to Sir David Tweedie, Anton Colella, David Wood and the Scottish Institute for giving me the opportunity to give this lecture, in memory of the Institute's beloved and respected late technical director Aileen Beattie.

The views I express are my own and should not be attributed to the Public Company Accounting Oversight Board as a whole or any other members or staff.

I did not have the opportunity to know Aileen Beattie. But I am aware of the great influence she had in bringing her Scottish values of prudence, ethics and integrity to bear on the intellectual development of the profession.

I understand from those who worked with her that she was critically important to advancing seminal policy papers, such as the Institute's ground-breaking document on "Auditing Into the Twenty-first Century," "Making Corporate Reports Valuable," and "Taking Ethics to Heart." These papers anticipated the issues we confront today and offered many constructive ideas to enhance the profession's leadership on the path forward into a future that Aileen no doubt saw as bright.

Her influence lives, even as the profession navigates the challenges that she was so equipped to chart.

As an American, your esteem for her makes me think of the great American patriot Nathanael Greene who, like Aileen Beattie, succumbed to illness decades too early.

Tutored in thought and eloquence by a Scotsman, of course, he brought incomparable foresight to the plans for what was then a new country. He spoke on and to the future, of principles I read in Aileen Beattie's work as well. To quote him —

"Learning is not virtue but the means to bring us an acquaintance with it. Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful. Let these be your motives to action throughout life: the relief of the distressed, the detection of frauds, the defeat of oppression, and diffusion of happiness."

These are the motives, the principles, underlying Aileen Beattie's work. She understood the requirements for a just and prosperous society. And she understood the role the profession can and should play to achieve it.

I am indeed honored to give this lecture in her memory, and in recalling her memory, I urge you to continue her work with the depth of thought and concern for the future that she would have brought to the task.

As I begin, let me say that, in David Tweedie, the Institute has had an inestimably able President worthy of Aileen Beattie's legacy. With characteristic directness, David has exhorted the profession to reinvent itself.

The audit market flirts with stagnation. In the United States, large audit firms' revenues from consulting are growing 15 percent a year. Audit fees have been flat, basically at the inflation rate. Audit practices have shrunk in comparison to audit firms' other client service lines.

Worldwide, many companies consider the audit an obligatory compliance function, best obtained at the lowest cost. Of course, quality can vary.

Our challenge is to find ways to harness the market as an ally in the cause of audit quality. It should reward firms with demonstrably superior quality, thereby encouraging the investment and backbone essential for quality auditing.

Yet the public — always angry when a fraud goes undetected — has trouble discerning the difference between one audit and another. With little information about particular audits, some members of the public seem to echo the clients, with the conventional wisdom that the audit is largely irrelevant to the investment process today: management says that KPIs and non-GAAP measures threaten to supplant the audit.

David has diagnosed the root of the problem in the audit report itself. As I will discuss later, I think he's onto something. He would have the audit report provide more useful information, and speak to and for investors.

Some say such a change would exacerbate the strain on the audit. David says it's the only way to save it.

I. Reliable, Insightful Information About the Users of Capital is Critical to Developing and Mending Vibrant Financial Markets.

We meet in the midst of a robust and wide-ranging global debate on how to use the audit, spurred both by public dismay over the uncertainties surrounding global financial institutions as well as resurgent national and regional hopes to build vibrant, competitive financial markets to strengthen local economies by giving local entrepreneurs better access to capital.

The move for stronger financial markets reflects a strategic decision to develop the infrastructure necessary to broaden access to capital, and a shared conviction that markets do deliver economic success.

But here lurks a paradox that helps explain the difficulty of changing the audit report.

As the noted, University of Chicago economists Raghuram Rajan and Luigi Zingales have written, "While everyone benefits from competitive markets, no one in particular makes huge profits from keeping the system competitive and the playing field level. Thus, nobody has a strong vested interest in promoting and defending free markets."[1]

The irony is that the task is left to government. Governments — at least democracies, where most developed financial markets reside — do reflect public opinion. Yet they are also subject to the opinion of those who have a special interest in an action, or a determination not to act, in the status quo.

Economic success depends on the confidence of the users of capital and the providers of capital alike. Even in the simplest model of finance, a lender will not lend to one who would borrow, without information sufficient to persuade the lender that the capital will be returned. Interest is set, subconsciously or upon deliberation, based on the lender's view of the risk that the capital will not be returned.

Our most sophisticated financial markets operate in the same way. From derivatives traders to venture capitalists, sovereign funds to micro-financiers, they all assess the risk to their capital, well or poorly, based on their level of confidence in the information they have about the borrower and the borrower's prospects. The absence or inadequacy of information translates to more risk and a higher, perhaps impractically high, return.

Micro-financiers (including usurers) usually know and have direct influence over their borrowers, or so they did until Muhammad Yunus (now Chancellor of Glasgow Caledonian University) reinvented the micro-finance market.

Yunus taught us that knowing about a pool of borrowers, and diversifying our lending among them, means that financiers can expand lending to increase returns with volume instead of risk. He capitalizes on the idea that groups of borrowers who guarantee each other's debts have as strong an incentive to monitor and enforce repayment as any lender.

Venture capitalists also know their borrowers, and they spend enormous resources to monitor their borrowers. It is popular for small, private, start-up companies to extol the virtues of their freedom from the burdens of public disclosure. Yet when one probes, we see that those entrepreneurs are indeed burdened with reporting, scrutiny and second-guessing, by no means all for ill of course.

Meanwhile, for the venture capitalist, the cost of seeking and reviewing information from a borrower, and providing the guidance necessary to keep the investment on course, may require a 50 percent return on the underlying investment.[2] That means ideas that cannot generate more than a 50 percent return may not be funded. As a society looking for economic success, this should concern us.

With this background, public markets are clearly a bargain for the users of public capital! No public company in a developed market must produce a 50 percent return to obtain capital.

This is because the information required to be provided to the markets is systematized, by securities regulators and financial accounting standard-setters, monitored by analysts, the press and others, and enforced through a combination of public and private mechanisms.

It is this flow of information that, when thought to be both relevant to investment decisions and reliable, gives uninformed, dispersed investors the confidence to participate in a market. Leveling the playing field for these uninformed, dispersed investors — that is, investors who have no ability to collect information directly and trade on it exclusively — is in turn critical to developing and maintaining market liquidity.[3]

A. The Critical Role and Moral Hazard of the Audit

Professional, skilled and independent auditors are key to helping investors in public markets separate the credible managers from the charlatans. By building a basis for confidence, auditors reduce financing costs, and contribute to an efficient allocation of capital to fuel economic growth.

The auditor, by representing the public interest in reliable information, forgoes popularity with management and takes on risk. That moral choice, makes the free market possible. In doing so, the auditor also changes the conduct of management of the audited entity. In this role, the independent auditor is the protector of free markets. They are Horatius at the bridge —

And how can man die better than facing fearful odds,
For the ashes of his fathers, and the temples of his gods?
[4]

As the Scotsman and father of modern economics, Adam Smith, said, since company directors manage other peoples' money, not their own, "it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in private copartnery frequently watch over their own."[5]

Thus the inspiration for the audit profession, created in the century after he wrote, to enable industrialists to amass the funds necessary for the great, capital intensive ventures of the 19th and early 20th centuries.[6]

The rationalist says that reason should motivate the users of capital to further develop our markets by supporting initiatives to enhance the scope, and independent validation and analysis of, information.

But Hume's Treatise on Human Nature teaches that we are motivated not by reason, but by a general, continually present desire for pleasure and the avoidance of pain.

Corporate managers don't necessarily want to provide more, or more insightful, information about their stewardship, lest the spotlight reveal their own warts and blemishes.

In this behavioral problem, managers link arms with Hume and Daniel Kahneman — avoidance of the pain of loss trumps future pleasure reaped only with risk.

As I said earlier, auditors may not necessarily want to tell it as they see it, lest they lose the engagement. I was recently told by one accountant that the PCAOB's proposal to require identification of the engagement partner in the audit report could, in his opinion, discourage new engagement partners from requiring restatements when they find errors in past accounts, lest the partner become known to potential future clients as a strict enforcer.

Adam Smith was known to say that it is not because of the benevolence of the baker that we have bread, but because of his desire to make money. Auditing is a public good, but we do harm to the public interest in that good when we forget that it is also a business.

We may wish auditors to be benevolent too, but they must act rationally, given the constraints the system imposes.

B. The EU Reforms

What we are now seeing is that the world is assessing and adapting what it can take from the best of existing models, to create the financial markets of the future. The audit will surely play a role.

In this assessment, you and your colleagues in Europe are making the weather, as Churchill would say.

I cannot predict how the debate on European reforms will come out. But what I can say, based on the lessons of both recent and historic economic thought, is that the lodestar should be that reliable, insightful information is the foundation of all financial markets.

I've been speaking generally about financial markets, and the role the audit profession plays in them. Let me turn now to the audit itself, and what we've learned from a decade of independent oversight of the profession's work on public company audits worldwide.

II. Auditor Independence, Objectivity and Skepticism are Critical to Effective Audits

After nearly ten years of inspecting the audits of issuers, the PCAOB has identified hundreds of engagements that did not meet PCAOB standards in significant respects.

These are serious audit deficiencies that mean, essentially, that the auditor left insufficiently audited an aspect of the financial statements that could include an undetected material misstatement.

This is a hard message. It is to be expected that the inspection findings are a disappointment to a profession proud of its reputation for, and substantial capital investment in, technical excellence.

Given this investment, I have no doubt that the profession as a whole is capable of delivering a high level of assurance as to the fairness of public company accounts. Yet some firms have even seen the number of findings increase in recent years.

It should not be surprising that auditor skepticism is both one of the most challenging issues in auditing as well as one of the most important for audit regulators to protect.

According to a compilation of inspection results from Canada, the U.S., the U.K. and Australia, prepared by the Canadian Public Accountability Board, "Insufficient Professional Skepticism . . . is undoubtedly the most common finding — that auditors are too often accepting or attempting to validate management evidence and representations without sufficient challenge and independent corroboration."[7]

In this respect, we are grateful for the leadership of Baroness Hogg and Stephen Haddrill: we always benefit from the consultation papers of the Financial Reporting Council, as well as the publications of the Scottish Institute, the Institute of Chartered Accountants of England and Wales and others.

In December 2012, the PCAOB issued a staff audit practice alert on Maintaining and Applying Professional Skepticism in Audits to remind auditors of the critical importance of professional skepticism to effective audits.

The Alert also describes a number of impediments to professional skepticism — including, for example, unconscious human biases and other circumstances that can cause auditors to gather, evaluate, rationalize, and recall information in a way that is consistent with client preferences rather than the interests of external users.[8]

Academics tell us that auditor independence, objectivity and skepticism is all the more important given the extraordinary amount of judgment that management is required to put into financial reporting, at the behest of investors looking for more and deeper insights to judge expected performance and returns.[9]

When considering the effects of conflicts of interest inherent in the audit environment, it is important to understand the academic literature on behavior. An extensive body of research documents the pervasive nature of subconscious bias. It is expansive, relatively consistent, and is not controversial among psychologists.

As Robert Prentice of the University of Texas at Austin has said, "[t]he evidence is compelling that, being human, accountants, including when acting in their role as auditors, are afflicted by self-serving bias."[10]

We should also be vigilant of the closely related phenomena of confirmation bias and belief persistence, which can cause people to subconsciously search for confirming rather than disconfirming evidence, and to hold onto beliefs even in the face of conflicting evidence.

According to Prentice, "[t]he more subjective the judgment, and the less certain the facts, the more influential the self-serving bias is likely to be, but the bias is pervasive and unrelenting."

Other human biases also have the potential to impede professional skepticism. They are behavioral concepts well-known to psychologists but not yet sufficiently acknowledged in audit, such as obedience to authority, groupthink, over-optimism, over-confidence and escalation of commitment.[11]

We should be attentive to research on the effects that switching to the issuer-pays model had on the credit rating industry. A recent study published in the Journal of Financial Economics found that switching to the issuer-pays model was associated with higher ratings after the switch.[12]

We should attend the warnings of the profession's great thinkers, such as Stephen Zeff, who reminds us of the concerns expressed by leaders of the profession as long ago as 1980 about the "descent from professionalism into commercialism."

I have yet to meet an auditor who does not cite and lament this change. I know it has been discussed in past Beattie lectures. What are the implications for professional skepticism?

And what of familiarity?

III. The PCAOB's Initiatives are Aimed at Enhancing the Relevance, Credibility and Transparency of Audits.

Against this backdrop, the PCAOB is pursuing several policy initiatives to consider ways to enhance the relevance, credibility and transparency of public company audits.

We have many projects under way to improve specific procedures auditors perform — procedures related to related parties, use of specialists, uses of other auditors in multi-location, and multi-firm audits. I would be happy to discuss these projects later in the evening.

But let me focus on three that most fundamentally go to the issues I've raised. They are intended to consider and find ways to address impediments to audit quality that transcend the auditor's procedures and are rooted in structural constraints.

They were each commenced with concept releases, meant to elicit and explore the best ideas on the role of the independent audit in our financial system, economy and society.

A wide variety of views on this role has been expressed by a wide variety of interested people. But the common theme — it was Aileen Beattie's theme, and I will say it has been a galvanizing theme — is that the audit is more important than ever.

People want more from the audit, not less. More insight, more independence, more reliability.

A. The Audit Reporting Model

First, I alluded to this earlier, but we are indeed considering whether a different form of report, oriented toward the needs of the users of the report, could expand the auditor's mindset to identify key insights about the audit that will help a user understand the quality of financial reporting.

The project is not about changing the nature or scope of the auditor's work. It's about making the results of that work more relevant.

I hope it will also help focus the auditor's mindset on the investor needs and perspective. The audit report should speak to the financial statement user, perhaps as it would if the user had personally contracted for the audit, as private equity investors do.

As you are no doubt aware, both the International Federation of Accountants' International Auditing and Assurance Standards Board and the European Commission have proposed changes to the report as well. We are monitoring their project closely as well.

We are likely to issue a proposal for public comment this summer, in time to benefit from comment that the IAASB will receive on its proposal, also due out mid-year.

More robust audit reports that demonstrate the strength and value of the audit should also lead to better public awareness, and appreciation for, auditors' skill and insight, providing further opportunity for the public to discern — and audit firms to compete on the basis of — quality.

B. Audit Transparency

That leads me to the second of these initiatives. We have proposed certain transparency measures, specifically to require disclosure in the audit report of the name of the engagement partner as well as participating firms in the audit.

Today, the audit report typically includes only the name of the principal auditor. Yet we are reminded, from time to time, that even sophisticated users of audit reports do not realize that audits for large companies are often performed by consortiums of separate audit firms.

It is the work of these undisclosed subsidiary auditors, and the rigor of the principal auditor's oversight of their work, that provides financial market participants with assurance that the necessary controls are in place and working effectively.

A recent study led by Carol Dee of the University of Colorado provides empirical evidence that information about other participants in the audit is valuable to investors.[13] The study examined annual disclosures on PCAOB Form 2, which requires firms to list audits in which they "played a substantial role in the preparation or furnishing of an audit report."[14] This indirect source of information[15] provided the authors with the ability to identify some, but not all, otherwise-undisclosed participants in audits.

Using the filing of the Form 2 as the event date, the authors investigated "whether the market reacts to the disclosure of other participants in audits," and documented a negative market reaction to companies whose audits involved other participants as compared to a control group that did not appear to involve other participants.[16]

If we want the audit profession to compete on quality more than price, we've got to provide markets more information about the audit. Knowing the name of the engagement partner on an audit, and the various other firms that participate in a global audit, is just a start. But it may help the investing public begin to identify and judge quality, leading to better auditing.

In this regard, I want to thank past Beattie lecturer Phillip Johnson, the past president of FEE, for a very thoughtful comment letter pointing out that the profession in Europe has long made public the names of engagement partners, to no harm to the auditors involved. Phillip is a faithful commenter when the PCAOB requests comment, for which I am most appreciative.

We are also engaged in a research project to identify audit quality indicators that are both measurable and reasonably objective. Some might be process, or input-related, measures, such as the ratio of audit staff to partners on an audit. Others might be results, or output-related, such as the history of restatements or warnings about going concern, again providing information to help markets distinguish high quality audits.

Our goals are to improve the information that participants in financial markets use to judge audit quality and, in doing so, to motivate audit firms to compete on quality.

C. Auditor Independence

Finally, in August 2011, the Board issued a Concept Release on Auditor Independence and Audit Firm Rotation. The concept release notes the importance of auditor independence to the viability of auditing as a profession and highlights the risk to independence arising from the "client-pays" model.

The PCAOB has embarked on several public meetings to engage prominent and thoughtful commenters with various, often conflicting, viewpoints.

They have included some of the most authoritative and experienced voices to address the subject of audit quality, auditor independence and the challenges to both. They offered varied perspectives as investors, senior executives and audit committee chairs of major corporations, chief executive officers of audit firms, academicians, and former regulators.

These views have led us to dig deeper for the most relevant insights and learning.

More often than not, past studies on the effect of auditor tenure have concluded that short-tenured audits are inferior in quality to those with long tenure.[17]

But as many academics who have participated in the PCAOB's public meetings have noted, it is questionable whether the findings from this stream of research provide much useful guidance to policy makers' consideration of term limits, because they focus on environments where auditor rotation is voluntary rather than mandatory. In particular, academics have observed that voluntary rotation may be associated with auditor-issuer disagreements, aggressive accounting, or other financial reporting issues.[18]

Threats to independence are documented: hold-harmless covenants, policies that suggest early termination penalties, aggressive pricing if significant non-audit fees are likely to be earned. Some of this evidence appears in the U.K. as well.

In a voluntary environment the auditor may have an incentive to please the client even in the first year, i.e. to build a long-term relationship. In PCAOB inspections, we have identified and documented the promises that some auditors have made to prospective clients, to be a "trusted partner," to support the client's "desired outcome" in accounting matters, to tread a "reduced footprint" to lessen "audit fatigue."

Do auditors feel obliged to deliver on such assertions in the early years to gain later ones? Would they make them if they knew their tenure would have to be shorter?

The European Union and its member states are engaged in their own inquiry and are considering term limits at the center of their debate.

I am aware of the many implementation challenges. I know the Dutch AFM is grappling with those challenges now, as firms begin to implement recently enacted legislation that mandates the rotation of audit firms every eight years.[19]

It will be important to consider the implementation and cost issues. Even in environments where term limits do not apply, there may be transition measures that should be considered even in voluntary turnovers. For example, handover files could help improve audits in early years in any event.

But emerging research finds term limits are associated with less earnings management, less managing to earnings targets, and more timely loss recognition post-adoption.[20]

Economic growth fosters personal freedoms. Vibrant financial markets propel economic growth. Reliable information undergirds capital formation. As crucial as the audit is to confidence in financial reporting, the skill and courage (and downright heroism) of the auditor is still where this complex societal structure comes to rest.

It remains the fundamental responsibility of the regulator to think critically and hard about whether institutional, structural arrangements either compromise or reinforce the independence, objectivity and skepticism of the auditor; foster or impede audit quality; and serve or thwart investor protection.

In Europe, you are embarked on change designed to strengthen your financial markets. I believe it is our obligation at the PCAOB to study, understand and analyze these efforts. We live and work in different auditing environments that are part of a globalized economy. As de Tocqueville studied our institutions when Europe had embarked on an era of democratic revolution, we should study your audit reforms: the audit has emerged as a common institution linking our markets. To do less than to understand this moment would be irresponsible.

* * *

Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful.

To recall Nathanael Greene, let these lessons be your motives to action, not a nostalgic desire for a past that has not served the profession or the financial markets as well as it could.

The changes in the audit reporting model, in audit transparency, and in audit standards as articulated in our public agenda, are intended to lay the groundwork for a vigorous future for the audit. We will study the broad implications of such actions in terms of consequences, economic effects, costs and benefits. At the end of the day, however, we can do no better than consider the examples of General Nathanael Greene and Aileen Beattie.

You have been a gracious audience and I thank you very much for this opportunity to speak to you. Let us use the remainder of our time for discussion.

[1] See R. Rajan & L. Zingales, Saving Capitalism from the Capitalists, Preface to the Paperback Edition (2004).

[2] Id. at 66.

[3] R. Rajan & L. Zingales, Financial Systems, Industrial Structure, and Growth, at 5 (paper prepared for the Symposium on the International Competiveness of the Swedish Financial Industry organized by the Bank of Sweden Tercentenary Foundation, 1999). The authors explain that —

[e]conomic theory suggests that a market becomes liquid when, somewhat counter-intuitively, there are a large number of uninformed investors willing to grease the wheels of trade. This is because when a market consists only of informed, experienced traders, everyone is trying to second-guess the counterparty's information from the way they trade, and few trades take place. The reasoning is "if you are willing to sell me this stock and I know you are smart, I keep wondering what it is you know that I do not, and am less willing to bu"'. The difficulty of providing uninformed investors the confidence to participate in the market when, by their very nature, they will not collect a great deal of information, is in our view on of the most important impediments to market liquidity.

[5] A. Smith, Wealth of Nations 439 (1776).

[6] See The Joint Stock Companies Act of 1844 and the Companies Clauses Consolidation Act of 1845.

[7] See Canadian Public Accountability Board, Auditing in the Decade Ahead: Challenge and Change, Audit Quality Symposium Pre-Reading Materials, at 36 (2011).

[8] A number of other regulators have also recently issued insightful reports on auditor independence and professional skepticism, including the Netherlands, France, Germany and Switzerland. See U.K. Audit Inspection Unit, 2009/10 Annual Report, at 4 (July 21, 2010) (stating that "[f]irms sometimes approach the audit of highly judgmental balances by seeking to obtain evidence that corroborates rather than challenges the judgments made by their clients" and that "[a]uditors should exercise greater professional scepticism particularly when reviewing management's judgments relating to fair values and the impairment of goodwill and other intangibles and future cash flows relevant to the consideration of going concern"); AFM, Report on General Findings Regarding Audit Quality and Quality Control Monitoring, at 13-14 (Sept. 1, 2010); Australian Securities & Investment Commission, Audit Inspection Program Public Report for 2009-2010 (June 29, 2011); CPAB, Enhancing Audit Quality: Report on the 2010 Inspections of the Quality of Audits Conducted by Public Accounting Firms, at 3 (April 2011); Auditor Oversight Commission (German), Report on the Results of the Inspections According to § 62b WPO for the Years 2007-2010 (April 6, 2011); Federal Oversight Authority (Switzerland), Activity Report 2010.

[9] Public Meeting on Auditor Independence and Audit Firm Rotation Before the Public Company Accounting Oversight Board (Oct. 18, 2012) (statement of Karen K. Nelson, Rice University).

[10] Public Meeting on Auditor Independence and Audit Firm Rotation Before the Public Company Accounting Oversight Board (Oct. 18, 2012) (statement of Robert A. Prentice, Univ. of Texas at Austin).

[11] For a further description of these concepts and their application to auditing, see, e.g., R. Prentice, Ethical Decision Making: More Needed Than Good Intentions, 63 (6) Financial Analysts Journal, 17-30 (2007).

[12] See Jiang, Stanford and Xie, Does It Matter Who Pays for Bond Ratings? Historical Evidence, 105 Journal of Financial Economics 607-21 (2010).

[13] C. Dee, A. Lulseged & T. Zhiang, Who Did the Audit? Investor Perceptions and Disclosures of Other Audit Participants in PCAOB Filings (Univ. of Colorado Denver, Working Paper, Aug. 2012).

[14] Id. at 2; see PCAOB Form 2 — Annual Report Form, Item 4.2, available at http://pcaobus.org/Registration/Documents/Form2Sample.pdf. See also PCAOB Rule 1001 (p)(ii), which defines the phrase "play a substantial role in the preparation or furnishing of an audit report" to mean: (1) to perform material services that a public accounting firm uses or relies on in issuing all or part of its audit report with respect to any issuer, or (2) to perform the majority of the audit procedures with respect to a subsidiary or component of any issuer the assets or revenues of which constitute 20% or more of the consolidated assets or revenues of such issuer necessary for the principal accountant to issue an audit report on the issuer.

[15] Dee, et al., supra note 13, at 2.

[16] Id. at 2, 30. Of course, this negative perception might result from a lack of sufficient information available for investors to draw conclusions about the quality of audits in which other participants are involved. If so, the PCAOB's proposal could help address this information asymmetry and allow investors to more accurately assess the value of an audit involving other participants.

[17] For one exception, see L. Davis, B. Soo & G. Trompeter, Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts26 Contemporary Accounting Research 517-48 (2009). This study finds that both short (three years or less) and long (15 years or more) tenure have detrimental effects on audit quality. See also M. Dao, S. Mishra & K. Raghunandan, Auditor Tenure and Shareholder Ratification of the Auditor, 22 (3) Accounting Horizons 297-314 (2008). This study suggests that shareholders view long auditor tenure as adversely affecting audit quality.

[18] See J. Casterella & D. Johnston, Research in Accounting Regulation (2013) (describing evidence that suggests that companies that voluntarily change auditors are already "troubled" companies and are more likely to have fraud and be financially distressed); J. Carcello & A. Nagy, Auditing: A Journal of Practice & Theory (2004) ("companies that change auditors are more likely to have financial reporting problems.").

[19] Dutch Audit Profession Act (Wet op het accountantsberoep), adopted on December 11, 2012 (33.025), amending the Audit Firms Supervision Act (Wet toezicht accountantsorganisaties, Wta), a copy of which can be found at: http://www.eerstekamer.nl/wetsvoorstel/33025_wet_op_het_accountantsberoep.

[20] See K. Harris & S. Whisenant, Mandatory Audit Rotation: An International Investigation (Univ. of Houston, Working paper, Mar. 2012).