Mandatory Audit Partner Rotation: Partners’ Perceptions of Benefits and Costs, and Implications for Future Research

Abstract

The Sarbanes-Oxley Act (SOX) accelerated the rotation of the lead audit engagement partner and extended the required cooling-off period. SOX also extended rotation requirements to concurring partners. Consequences of accelerated rotation and extended cooling-off have yet to be explored in depth, in part because the new rules only became effective in 2004 and the full effect of the revised rotation schedule has yet to be felt. Using a combination of semi-structured interviews and field surveys, we investigate perceptions of audit partners serving publicly-traded companies about the impacts of rotation and cooling-off; and the SOX-imposed rule changes on audit quality and audit partners’ quality of life. Our findings suggest that, although rotation may enhance auditor independence, it may also have an overall negative impact on audit quality through its dilution of client-specific and industry expertise, and its negative impact on partners’ quality of life. Most notably, our results point to an immediate threat to audit quality resulting from accelerated rotation as partners report a two-to-three year client familiarization period, and a preference to learn a new industry rather than relocate. Further, partners felt their firms were at increased risk of losing clients in the year of mandatory partner rotation, suggesting a need to more fully understand the effects of accelerated partner rotation as this may heighten independence risk as firms strive to retain clients. Our findings also suggest a number of avenues for future research.

Keywords: Sarbanes-Oxley, Audit Partner Rotation, Auditor Independence, Audit Quality, Quality of Life

JEL Classification: M4, M42, M48