Short Horizon for Audit Partner and Earnings Quality: Evidence from a Dual-Rotation Regime.

• In Event: Effects of Audit Regulation

Abstract

Despite regulators’ intention to use mandatory auditor rotation to promote professional skepticism and improve audit quality, frequent mandatory partner rotation can introduce a tenure horizon problem and impede earnings quality. While there is rich literature on auditor rotation, very few exist on the effect of a dual-mandatory rotation regime. We hypothesize that earnings quality is lower because shorter horizons for audit partner limit their audit investments and do not let them to acquire enough client-specific knowledge. Using data from Italy, we find that clients whose auditors have short horizons, due to dual rotation regulations, deliver lower earnings quality. Our findings provide insights for academics and regulators in evaluating auditor rotation strategies in their countries, especially in the European Union, where member states are implementing both mandatory audit-partner and audit-firm rotation.

Authors

• Tatiana Mazza, Free University of Bozen

• Stefano Azzali, University of Parma

• Kenneth J Reichelt, Louisiana State University