Abstract

In 2016, the EU started to require mandatory rotation of audit firms for banks, insurance companies, and large publicly held companies. With this regulatory change, the policymaker aimed to increase audit independence and reduce audit firm concentration. But conceptual arguments exist both for and against the hypothesized concentration effect. In support of the hypothesis, mandatory rotation could, in theory, increase opportunities for smaller audit firms to be considered for mandates. Against the hypothesis, more dynamic markets may yield advantages to higher resourced entities for developing and maintaining the product attributes that attract clients.  As a major intervention in market dynamics with ambiguous effects, the concentration impact merits study. We argue that the regulatory change can be considered as an experiment. Audit firm rotation was not required for non-publicly held firms, or by another major jurisdiction that also considered it (the US); furthermore, EU-wide rollout was preceded by Italy's implementation of the rule in 1975. By adopting these three distinct comparators, we estimate that the policymaker's desired reduction in concentration was limited or absent. This finding is important for policymakers who consider audit firm rotation.