The Impact of Fresh Eyes: How a Change in the Engagement Team Impacts the Reporting of Internal Control Material Weaknesses

• In Event: Auditing and Auditor Characteristics

Abstract

Regulators have repeatedly debated mandatory auditor rotation. Proponents emphasize the benefits that a new auditor brings, specifically, improved independence and a fresh perspective, leading to higher quality audits. However, opponents argue that changing auditors is costly and impedes audit quality. The United States currently requires audit partner rotation, but it is not clear that partner change alone significantly impacts audit outcomes. In this paper, we provide evidence that the fresh perspective brought about by changes in the engagement team improves the detection and reporting of internal control material weaknesses (ICMW) after controlling for the likelihood of the existence of ICMW. We examine three different engagement team changes: audit firm change, audit office change, and audit partner change. Our findings show that a turnover of the whole engagement team through an audit firm change increases the likelihood of the auditor reporting an ICMW. This effect is larger than that for either partial engagement team changes (i.e., office and partner changes). Additionally, we do not find any association between partner change and the likelihood of a reported ICMW.

Authors

• Hannah E. Richards, Winthrop University

• Ramgopal Venkataraman, University of Texas-Arlington