Audit Partner Succession Planning and Audit Quality: Evidence from Staggered Partner Rotations

• In Event: Auditor Rotation

Abstract

Recent literature finds that audit firms engage in strategic audit partner succession planning by overlapping partners’ experience on clients. While audit firms suggest this can mitigate the harmful effects of audit partner rotations on audit quality, little is known about whether succession planning translates into actual audit quality improvement. Using audit opinions where two signing partner names are disclosed, we empirically examine partner rotations with more succession planning (staggered rotation of only one partner) and less succession planning (simultaneous rotation of both partners). We find strong support that staggering partner rotations is beneficial to audit quality. Compared to simultaneous rotations, staggered rotations are associated with more audit adjustments that decrease clients’ overstated earnings, fewer financial restatements, fewer regulatory misconduct sanctions, and lower levels of discretionary accruals. Additional tests support our findings.

Author

• Eric R Lohwasser, Colorado State University