Audit Partner Rotation and Financial Reporting Quality

Auditing: A Journal of Practice & Theory, Forthcoming

52 Pages Posted: 7 Mar 2014

See all articles by Barri Litt

Barri Litt

Nova Southeastern University - H. Wayne Huizenga School of Business & Entrepreneurship

Divesh Sharma

Kennesaw State University, School of Accountancy

Thuy H. Simpson

University of Nebraska-Lincoln

Paul Tanyi

University of North Carolina (UNC) at Charlotte - Department of Accounting

Date Written: March 6, 2014

Abstract

Audit partner rotation has received considerable attention globally and in the U.S. since the Sarbanes-Oxley Act of 2002 accelerated the rotation period from seven to five years and expanded the cooling-off period from two to five years. However, research on the effects of audit partner rotation on financial reporting quality in the U.S. is virtually non-existent, largely due to the absence of publicly available information on audit partners. Using a novel approach to determine audit partner rotation, we investigate the effect of rotation on financial reporting quality in the U.S. We find evidence of lower financial reporting quality following an audit partner change. Specifically, we find lower financial reporting quality during the first two years with a new audit partner relative to the final two years with the outgoing partner. We find the lower financial reporting quality to be more prevalent for larger clients. Further analyses suggest the initial year post-rotation presents audit challenges for Big 4 partners, which persist for at least three years for non-Big 4 partners. Audit challenges also appear greater for city-level non-industry specialist auditors and smaller audit offices. We discuss the implications of our results for regulators, policymakers, and the profession at large.

Keywords: Audit Quality; Earnings Management; Financial Reporting Quality; Discretionary Accruals; Meet or Beat; Partner Rotation

JEL Classification: M41

Suggested Citation

Litt, Barri and Sharma, Divesh Shankar and Simpson, Thuy H. and Tanyi, Paul, Audit Partner Rotation and Financial Reporting Quality (March 6, 2014). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2405483

Barri Litt

Nova Southeastern University - H. Wayne Huizenga School of Business & Entrepreneurship ( email )

Ft. Lauderdale, FL 33314
United States

Divesh Shankar Sharma

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

Thuy H. Simpson

University of Nebraska-Lincoln ( email )

Lincoln, NE 68588
United States

Paul Tanyi (Contact Author)

University of North Carolina (UNC) at Charlotte - Department of Accounting ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

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