The Effect of Previous Working Relationship between Rotating Partners on Mandatory Audit Partner Rotation

This study adds to the literature on mandatory rotation of audit partners in Chinese companies by examining the effect of the pre-rotation relationships between incoming and outgoing partners. We consider the rotating partners to have prior working relationship if they were cosigners of audit reports before the rotation. We find two different outcomes of having prior working relationship: (a) increasing the likelihood that outgoing partners rotate back after the cooling off period, and (b) lower audit quality improvement after rotation. These findings bring into question the extent to which rotating partners with prior working relationships are truly independent.     

Further evidence on mandatory partner rotation and audit pricing: a supply‐side perspective

This study examines effects of mandatory partner rotation (MPR) on audit fees of Australian‐listed companies. Using a fee changes approach, evidence of fee increases in year of the MPR driven by smaller offices of non‐Big 4 auditors is found, consistent with supply‐side resource constraint arguments. Broadly consistent findings are observed using a fee levels approach. Appointment of inexperienced partners to MPR engagements has no discernible effect on fees. Additional analysis of audit reporting lag indicates fee increases reflect additional audit effort as opposed to a pricing strategy. Overall, the evidence supports recent moves by policy‐makers to soften MPR requirements.     

Does auditor tenure influence the reporting of conservative earnings?

In this study, we examine the relation between auditor tenure and the reporting of conservative earnings. Using several measures of conservatism, we document a positive association between the conservatism in reported earnings and the length of the auditor–client relationship. We further document an increase in conservatism between short and medium tenure that does not deteriorate over long tenure. Collectively, the results imply lower conservatism for short auditor tenure, which suggests that mandating auditor rotation may have an adverse affect on the conservatism in reported earnings.     

How do auditor rotations affect key audit matters? Archival evidence from South African audits

The expansion of the auditor's reporting duties with the introduction of critical or key audit matters (KAMs) has reignited interest in the determinants and consequences of the rules and regulations aimed at improving audit's functionality and quality. This paper expands on a growing body of work which investigates possible determinants of the KAMs being included in audit reports. It provides an original perspective on KAM identification and reporting in three ways. Firstly, the paper deals specifically with audit partner and firm rotations as possible KAM determinants. Secondly, hand-collected details are analysed to test for changes in the absolute number of KAMs as well as for KAMs added to or removed from audit reports to provide a more refined measure of how KAM disclosures are varying. Finally, data are gathered from South Africa to complement the empirical work which, to date, has largely focused on the U.S. and U.K. Our findings reveal a duality of stability and variability in how the requirement to report KAMs is being operationalised. A change in audit partner is not associated with changes in reported KAMs but changing audit firms appears to have a significant impact on the KAMs added to or removed from an audit report. The provisions of ISA 701 promote consistency in how KAMs are identified and disclosed by individual partners. However, ISA 701 cannot define and control every aspect of KAM determination. As a result, there is a degree of agency at the firm-level which allows for differences in how audit firms choose to implement the standard's provisions. Our study makes an important contribution by providing evidence of the complex interaction between standardisation of audit practice and sources of performative variability and may lend weight to the regulatory arguments in favour of mandatory firm rotation.     

The effects of audit firm rotation on perceived auditor independence and audit quality

Our study explores loan officers’ perceptions of auditors’ independence and audit quality under three experimental audit firm rotation scenarios. We use a case experiment with a between-subjects design to determine whether rotation of the audit firm impacts financial statement users’ perceptions of auditor’s independence and quality. Findings based on 212 useable responses indicate that loan officers do perceive an increase in independence when the company follows an audit firm rotation policy. However, the length of auditor tenure within rotation fails to significantly change loan officers’ perceptions of independence. Findings also indicate that neither the presence of a rotation policy nor the length of the auditor tenure within rotation significantly influences the loan officers’ perceptions of audit quality.     

Does shared tenure between audit committee chair and engagement partner affect audit outcomes? Evidence from the UK

Social psychology literature suggests that shared working experience between individuals affects the way in which they communicate, interact and exchange information. Given that the relationship between audit committee (AC) and engagement partner (EP) involves extensive interactions and information sharing with the aim to protect the integrity of financial statements, this study examines whether the co-tenure relationship between the person who leads the AC (audit committee chair (ACC)) and EP affects audit outcomes. Using 234 UK non-financial companies, we find that longer co-tenure between ACC and EP improves accruals quality and reduces the propensity to meet or beat the earnings benchmark. Moreover, we do not find a significant relationship between ACC–EP shared tenure and audit fees, alleviating the concern that ACC–EP shared tenure could lead to collusion or inappropriate favoritism towards the EP regarding audit fees. Our findings offer a valuable contribution to the literature, practice, and regulators.     

Do investors perceive a change in audit quality following the rotation of the engagement partner?

Though Section 203 of the Sarbanes-Oxley Act (SOX) calls for the rotation of the audit partner every five years, we do not know whether investors value audit partner rotation. This is an important issue since many in the auditing profession believe that mandatory rotation of the audit partner is unnecessary and may in fact impair audit quality. We identify a sample of firms that disclosed changes in the engagement partner in the proxy statement and examine whether equity investors perceive a change in audit quality following the partner rotation. We find a significant increase in earnings informativeness following audit partner rotation. We also find that short sellers regard earnings in the post-rotation to be of higher quality than earnings prior to the rotation. Finally, cost of equity capital is lower following partner rotation. Our findings have important implications for the regulators, auditors, and investors.     

审计师变更与审计质量:一个理论分析

本文通过建立股东、管理层和审计师三方参与的两委托人-单代理人博弈模型,研究了固定审计费用下不同审计师变更方式对审计质量的影响。研究结果表明,审计师强制性单期变更与审计师强制性定期变更下,审计师与管理层之间的合谋将导致严重的财务舞弊;而在审计师自愿性变更下,股东可以利用解聘现任审计师这一威胁来阻止审计师和管理层之间的合谋,使得审计师和管理层的最优策略均为真实披露公司的盈余信息,并发表标准无保留审计意见。     

Auditor specialization, perceived audit quality, and audit fees in the local government audit market

Prior governmental research implies a positive relation between auditor specialization and audit quality, but the effect of specialization on audit fees is mixed. However, no single governmental study investigates the effect of auditor specialization on both audit quality and audit fees. Also, prior studies focus on either large- or small audit firms and often employ indirect proxies for audit quality. We study the effects of auditor specialization on perceived audit quality and audit fees. Our data represent both Big 5 and smaller audit firms and include three market-based measures of specialization. We survey 241 Florida local government finance directors and find that specialization is positively associated with perceived audit quality but not with audit fees. We also find that Big 5 auditors, often used as a proxy for higher audit quality in prior research, are not uniformly associated with increased perceived audit quality but consistently charge higher audit fees. Our results confirm a relation between measures of audit firm specialization and audit quality and raise questions regarding audit firm size and audit quality in the municipal sector. Our findings suggest that engaging specialized auditors may be good policy for many local governments.     

签字注册会计师强制轮换制度提高了审计质量吗?——基于中国上市公司的实证研究

本文分析了我国签字注册会计师强制轮换制度对审计质量的影响,并检验了影响制度效果的主要因素。研究发现,强制轮换制度总体上没有显著提高审计质量,其原因一是强制轮换制度执行中存在规避行为,导致审计师变更频繁和过渡审计师的出现,其对应审计质量较低;二是强制轮换制度实施后,新任审计师的平均专业胜任能力下降,导致审计质量下降。而具有原客户审计经验的审计师在被强制轮换后重新审计该客户的审计质量较高,这能在一定程度上抑制上市公司审计质量的整体下滑。本文的发现对进一步完善签字注册会计师强制轮换制度有较好的参考意义。