The Effects of Auditor Rotation, Professional Skepticism, and Interactions with Managers on Audit Quality

Posted: 23 Aug 2011 Last revised: 7 Jan 2015

Kendall Bowlin

University of Mississippi - Patterson School of Accountancy

Jessen L. Hobson

University of Illinois at Urbana-Champaign

M. David Piercey

University of Massachusetts Amherst

Date Written: September 25, 2014

Abstract

We examine whether the effect of mandatory auditor rotation on audit quality depends on the mental frame auditors adopt in evaluating management representations. In practice, auditors can alternately frame their assessments of management representations in terms of their potential dishonesty (what we term skepticism) or potential honesty. 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 occurs when auditors do not rotate, but requiring rotation can reduce audit effort for auditors using a skeptical frame. An implication of our study is that focusing auditors on a skeptical assessment frame rather than mandating auditor rotation may be a less costly way to reduce low-effort audits and aggressive reporting.

Keywords: Auditor Rotation; Professional Skepticism; Audit Quality; Game Theory

JEL Classification: C70, C90, G30, M42

Suggested Citation

Bowlin, Kendall and Hobson, Jessen L. and Piercey, M. David, The Effects of Auditor Rotation, Professional Skepticism, and Interactions with Managers on Audit Quality (September 25, 2014). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1914557 or http://dx.doi.org/10.2139/ssrn.1914557

Kendall O. Bowlin

University of Mississippi - Patterson School of Accountancy ( email )

Oxford, MS 38677
United States

Jessen L. Hobson

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

M. David Piercey (Contact Author)

University of Massachusetts Amherst ( email )

Isenberg School of Management
121 Presidents Drive
Amherst, MA 01003
United States

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