Mandatory Audit-Partner Rotation, Audit Quality and Market Perception: Evidence from Taiwan

Posted: 2 Sep 2008

See all articles by Wuchun Chi

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting

Huichi Huang

Oregon State University - College of Business

Yichun Liao

National Chengchi University

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Date Written: August 31, 2008

Abstract

We examine the effectiveness of mandatory audit-partner rotation in promoting audit quality and perceptions of audit quality using audit data from Taiwan, where a five-year audit-partner rotation became de facto mandatory in 2004. We identify a sample of companies in 2004 whose audit partners were subject to mandatory rotation and compare this mandatory rotation sample with three benchmark samples: (1) companies in 2004 whose audit partners were not subject to mandatory rotation, (2) companies in the mandatory rotation sample one year ago in 2003, and (3) companies in years before 2003 whose audit partners were voluntarily rotated. Using both absolute and signed abnormal accruals as proxies for audit quality, we find no evidence that mandatory audit-partner rotation enhances audit quality. In addition, we use the earnings response coefficient as a proxy for investor perceptions of audit quality and find no consistent evidence that mandatory audit-partner rotation enhances perceived audit quality. Taken together, our findings are inconsistent with the belief that mandatory audit-partner rotation enhances audit quality or perceptions of audit quality.

Keywords: Mandatory audit-partner rotation; Auditor tenure; Audit quality; Perceptions

JEL Classification: M41

Suggested Citation

Chi, Wuchun and Huang, Huichi and Liao, Yichun and Xie, Hong, Mandatory Audit-Partner Rotation, Audit Quality and Market Perception: Evidence from Taiwan (August 31, 2008). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1261724

Wuchun Chi (Contact Author)

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan 116, Taipei
Taiwan
886-2-29393091-81031 (Phone)
886-2-29387113 (Fax)

HOME PAGE: http://www3.nccu.edu.tw/~wchi/

Huichi Huang

Oregon State University - College of Business ( email )

224D Bexell Hall
Corvallis, OR 97331
United States

Yichun Liao

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Hong Xie

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

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