An Emprical Analysis of the Costs and Benefits of Audit Partner Rotation in the United States

• In Event: U.S. Audit Partners

Abstract

Abstract: Most of the direct evidence concering the effectiveness of audit partner rotation is based on international samples due to a lack of available data in the U.S. Using a creative method to identify audit partner rotation in the U.S., we gather a sample of public corporations and assess the costs and benefits of audit partner rotation. We provide evidence that audit quality, as measured by discretionary accruals and just miss earnings, increases in the first year of a new partner’s tenure subsequent to partner rotation. We find rotation has no impact on audit fees but contributes to audit lag. Our evidence shows that the greatest improvements in audit quality are for small audit offices as well as more complex clients. Based on additional analyses, we conclude that the improved audit quality is not the result of greater expertise or client knowledge but is attributable to auditor conservatism.

Authors

• Carl W. Hollingsworth, Clemson University

• Terry L Neal, University of Tennessee-Knoxville

• Colin D Reid, Washington and Lee University