Does Mandatory Rotation of Audit Partners Improve Audit Quality?

ABSTRACT

Opponents of mandatory rotation argue that a change of partner is bad for audit quality, as it results in a loss of client-specific knowledge. On the other hand, proponents argue that a change of partner is beneficial, as it results in a positive peer review effect and a fresh perspective on the audit. We test the impact of mandatory partner rotation on audit quality using a unique dataset of audit adjustments in China. Our results suggest that mandatory rotation of engagement partners results in higher quality audits in the years immediately surrounding rotation. Specifically, we find a significantly higher frequency of audit adjustments during the departing partner's final year of tenure prior to mandatory rotation and during the incoming partner's first year of tenure following mandatory rotation.

Keywords:  mandatory rotation, audit partners, audit quality, audit adjustment

Source : Clive S. Lennox, Xi Wu, and Tianyu Zhang (2014) Does Mandatory Rotation of Audit Partners Improve Audit Quality?. The Accounting Review: September 2014, Vol. 89, No. 5, pp. 1775-1803.