The Effects of Auditor Rotation, Professional Skepticism, and Interactions with Managers on Audit Quality
University of Mississippi - Patterson School of Accountancy
Jessen L. Hobson
University of Illinois at Urbana-Champaign
M. David Piercey
University of Massachusetts at Amherst
February 28, 2014
We examine whether the effect of mandatory auditor rotation on audit quality depends on the mental frame auditors adopt in evaluating manager representations. In practice, auditors can alternately frame their assessments of manager representations in terms of their potential honesty or potential dishonesty (a skepticism frame). Using psychology theory and a laboratory experiment, we predict and find that mandatory rotation improves audit quality when an auditor takes an honesty frame, but that this effect reverses when an auditor takes a skeptical frame. Thus, the benefit of using a skeptical frame to assess manager representations occurs when auditors do not rotate, and requiring rotation can lead to harmful effects for auditors using a skepticism frame. An implication of our theory and findings is that, given the significant costs associated with rotation, focusing auditors on a skeptical assessment frame without requiring rotation may be a less costly way to improve audit quality.
Number of Pages in PDF File: 50
Keywords: Auditor Rotation; Professional Skepticism; Audit Quality; Game Theory
JEL Classification: C70, C90, G30, M42working papers series
Date posted: August 23, 2011 ; Last revised: February 28, 2014
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