Does Audit Partner Rotation Enhance Audit Quality? Evidence from Japan

Abstract:     
I examine that relationship between audit partner rotation and audit quality using 4,232 Japanese listed companies from 2003 to 2006. Firstly, I find that audit-partner rotation over seven years and lead audit-partner rotation over five years have a negative relationship with abnormal accruals on the condition that the tenure of the other audit-engagement partner is seven years or less. Secondly, I find that the impact of rotation of the lead audit partner is a little higher than that of the audit partner. Thirdly, I find that the impact of rotation of (lead) audit partners in non-Big 4 situations is higher than in Big 4 contexts. And fourthly, in the non-Big 4 sample, there are systematic differences between complete rotation of audit partners (lead audit partners), which pushes earnings downward and partial rotation of audit partners (lead audit partners), which pushes earnings upward. These results suggest that complete rotation of audit-engagement partners over seven years (lead audit partners over five years) enhances auditor independence; as a result, it brings conservative accounting policy.

Number of Pages in PDF File: 26

Keywords: Audit partner rotation, Audit quality, Earnings management

JEL Classification: M41

working papers series