The Effect of Engagement and Review Partner Tenure and Rotation on Audit Quality: Evidence from Germany

Abstract

This study contributes to the recent debate over the effect of audit partner tenure and rotation on auditor independence, expertise and, ultimately, audit quality. We investigate the effect of partner tenure and rotation on audit quality, using unique 1995-2010 data from all German listed companies for which we identify not only the audit engagement but also the quality review partner. Using multiple absolute and signed values earnings management measures as proxies for audit quality, we find evidence of less income-reducing accounting with an increase in review partner tenure (but not engagement partner tenure). Further, rotation of the review partner (but not the engagement partner) is associated with more income-reducing accounting. These findings underline the importance of distinguishing between the two partner roles and support the expertise hypothesis with respect to the review partner.

Keywords: Audit partner rotation, Audit partner tenure, Audit quality, Review partner

JEL Classification: G34, G38, M41, M42, M48