The Relationship Between Auditor Rotation and Audit Quality of Commercial Banks in Kenya

Abstract

The objective of this study was to establish the relationship between audit quality and audit rotation in the banking industry in Kenya. Theoretically, it is assumed that audit rotation leads to high quality audit since the new auditor is not acquainted with management. Multiple linear regression with audit quality as the dependent variable and audit rotation, consultancy services offered and audit as the independent variables was used. These variables were used to establish whether there is any relationship between audit quality and audit rotation in the banking industry in Kenya. Primary data was collected through questionnaires and interviews in regards to 2013 financial year ends and analyzed using statistical tools. The population used was the 43 commercial banks in Kenya. The means and standard deviations were calculated for the descriptive data and multiple regression analysis was used to answer the research questions. The study results indicated that provision of consultancy services had the highest effect on audit quality followed by audit fees. Audit rotation had the least effect of the three variables with a small beta coefficient. One of the limitations that the study encountered was a low response rate due to confidentiality of audit services provided to banks. Also, the overall rating of audit quality was not fully objective since they were rated by managers who give their opinion. The study recommends for an audit quality rating agency which can sample a number of companies and rate the audit work done on those companies based on certain factors. This would help improve the audit quality done by auditors to their clients. Also, the study recommends that banks need to have shorter audit tenure as the new auditors will pump in new ideas. Audit rotation is important for banks and there should be a minimum of two auditors in a span of ten years to improve quality