Implementation of Regulation (EU) No. 537/2014 and Audit Quality: Evidence from Swedish Public Listed Companies

Sammanfattning

The establishment of EU Regulation No. 537/2014 (2016 EU audit reform) aimed to improve areas such as auditor independence, reliability of financial statements and governance mechanisms through combination of regulatory provisions including mandatory audit rotation, extended audit report, limitations on non audit services and improved audit committee roles and responsibilities. Therefore, the study examines the impact of implementation of 2016 EU audit reform on audit quality in Swedish publicly listed companies. The research design is based on quantitative research design and used a sample of Swedish listed firms during the period of 2013-2019, using a pre- and post reform framework combined with difference in differences approach. In order to measure the audit quality, two proxies were used and abnormal accruals proxy evaluate the financial reporting quality whereas audit fee proxy evaluate the audit risk, effort and market dynamics. The moderating role of audit committees is also evaluated to identify in what way the internal governance mechanisms contribute to effective implementation of audit reform at the firm level and finally the firms’ audit quality. Mixed results were provided by the findings regarding the impact of EU audit reform on audit quality. Accordingly, audit reform does not express significant direct impact on abnormal accruals while audit fee is declining during post-reform period, signifying changes in the audit market due to regulatory impact rather than progress in audit quality. Nonetheless, the findings showed that firms with audit committees experienced significantly lower abnormal accruals during the post reform period indicating that effective governance mechanisms may facilitate the main objectives of EU audit reform and improved the quality of audit. Overall, the findings of this study revealed that regulatory reform needs to combine effectively with firm level governance structures such as audit committees in order to achieve improved audit quality.