Audit Rotation Policy and Audit Quality: Evidence from Nigerian Listed Firms

This study examines the effect of audit rotation policies on audit quality in companies listed on the Nigerian Exchange Group. Mandatory audit firm rotation, which requires companies to change their external auditor after a specified period, has been debated internationally as a mechanism for preserving auditor independence and improving audit quality. Nigeria's Companies and Allied Matters Act and the FRCN Audit Quality Indicators framework have introduced provisions on auditor tenure, but their impact on actual audit quality has not been empirically assessed in the local context. This study uses an ex-post facto design, analyzing audit quality data from 22 listed firms that experienced mandatory or voluntary auditor changes between 2018 and 2023, compared with a control group of 22 firms with continuous auditor relationships. Audit quality is proxied by discretionary accruals computed using the modified Jones model, going concern opinion issuance, and audit report timeliness. Logistic and OLS regression are applied. Results indicate that auditor changes are initially associated with a modest improvement in audit quality, measured by reduced discretionary accruals, but the effect diminishes after two years of the new engagement. Long audit tenures exceeding 10 years showed a statistically significant negative association with audit quality. The study concludes that periodic audit rotation contributes to audit quality preservation in Nigerian listed companies. It recommends that the FRCN establish a mandatory audit firm rotation policy of seven years, with a cooling-off period of three years before reappointment.

Keywords: audit rotation, audit quality, auditor independence, Nigerian Exchange Group, discretionary accruals.