Mandatory Audit Firm Rotation’s Effects in Scandinavia : A Comparative Evaluation of the Effects of EU Regulation 537/2014 on Audit Costs, Quality and Competition in Sweden and Norway

Sammanfattning

Mandatory audit firm rotation (MAFR) came into law in Sweden in 2016 and in Norway in 2021, following the approval of EU Regulation 537/2014. The European Commission emphasized the “familiarity threat” as a primary concern affecting auditor independence and audit market competition. While previous literature has evaluated aggregated EU market results, institutional heterogeneity is often disregarded. In this study, the effect of EU Regulation 537/2014 on two institutionally similar countries with high-trust institutional environments is assessed. It is not obvious that a centralized EU regulation will have homogeneous effects across all member states, and research on the Scandinavian context is limited. By using a stepwise empirical approach with increasing degrees of robustness; Difference-in-Differences (DiD) model and an event study with time, country, and firm fixed effects, I analyse the effects of Regulation 537/2014 thereby contributing to the existing literature. These models evaluate the reform’s impact on audit fees, non-audit services (NAS), and discretionary accruals (DA), supplemented by an analysis of audit market competition in Norway and Sweden. The results indicate a 36% increase in statutory audit fees with no change in NAS. The data suggests a transition from big-four to big-six dynamics in Sweden, whilst both the big-four and the big-six have lost market shares in Norway. While the standard event study suggests a potential decrease in audit quality (DA), these effects are not robust suggesting that the reform’s welfare impact remains limited in high-trust institutional environments. There were no effects on audit fees or NAS when rotating audit firm. Therefore, the findings suggest that Regulation 537/2014 may have affected statutory audit fees and competition in the Scandinavian audit market, whilst effects on audit quality are not robust enough to draw a final conclusion.