In this study, we analyze the impact of the mandatory rotation of audit firms on audit quality. Two lines of opposite arguments have fueled the ongoing debate about the convenience of mandatory rotation. Its supporters argue that this rule safeguards auditor independence and, thus, increases audit quality. Its opponents claim that mandatory rotation impairs auditor specific knowledge and reduces audit firm incentives to compete in the market and, thus, decreases audit quality. Rotation of audit firms every nine years was mandatory in Spain from 1988 to 1995. Thus, the Spanish context provides a unique setting to obtain empirical evidence on this rule. We test two competing hypotheses about the impact of the removal of mandatory rotation on the likelihood of auditors issuing goingconcern modified audit opinions. The sample consists of Spanish quoted financially stressed companies observed in a regime with mandatory rotation (period 1991–1994) versus a regime without this rule (1995–2000). We find evidence to suggest that the removal of mandatory rotation led to an increase in the likelihood of auditors issuing going-concern opinions. Overall, our results provide empirical support for the arguments put forward by the opponents of mandatory rotation.

Key words: audit quality, auditor mandatory rotation, auditor independence.
JEL classification: G38, L15, M4.