HCBE Faculty Articles

Title

Costs of Mandatory Periodic Audit Partner Rotation: Evidence from Audit Fees and Audit Timeliness

Document Type

Article

Date

2-2017

Publication Title

Auditing: A Journal of Practice & Theory

ISSN or ISBN

0278-0380

Volume

36

Issue

1

First Page

129

Last Page

149

Description

The constricted mandatory audit partner rotation rules for U.S. public companies have fueled intense debate among the profession, regulators, and policymakers. This topic remains controversial, but neither side has provided evidence of the consequential benefits and costs of mandatory rotation. While rotation effects on audit quality have been examined, we empirically examine its effects on two audit production costs: audit fees and audit timeliness. We find significantly higher audit fees and significantly longer audit report lags in the period immediately following mandatory audit partner rotation. These effects are more pronounced for non-Big 4 auditors, larger clients, and audit offices that are not industry specialists. Moreover, the audit fee and audit timeliness effects persist in successive audit partner rotations, suggesting that client-specific knowledge gained through longer audit firm engagement does not completely mitigate loss of client-specific knowledge at the partner level. Our findings provide new empirical evidence supporting the profession's arguments that mandatory audit partner rotation is costly to multiple stakeholders, including clients, auditors, and investors.

DOI

10.2308/ajpt-51515

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