Costs of Mandatory Periodic Audit Partner Rotation: Evidence from Audit Fees and Audit Timeliness

Posted: 6 Aug 2016

See all articles by Divesh Sharma

Divesh Sharma

Kennesaw State University, School of Accountancy

Paul Tanyi

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

Barri Litt

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

Date Written: August 4, 2016

Abstract

The constricted mandatory audit partner rotation rules for U.S. public companies have fueled intense debate among the profession, regulators, and policymakers. This topic remains controversial, but neither side has provided evidence of the consequential benefits and costs of mandatory rotation. While rotation effects on audit quality have been examined, we empirically examine its effects on two audit production costs: audit fees and audit timeliness. We find significantly higher audit fees and significantly longer audit report lags in the period immediately following mandatory audit partner rotation. These effects are more pronounced for non-Big 4 auditors, larger clients, and audit offices that are not industry specialists. Moreover, the audit fee and audit timeliness effects persist in successive audit partner rotations, suggesting that client-specific knowledge gained through longer audit firm engagement does not completely mitigate loss of client-specific knowledge at the partner level. Our findings provide new empirical evidence supporting the profession’s arguments that mandatory audit partner rotation is costly to multiple stakeholders including clients, auditors, and investors.

Keywords: partner rotation; partner change; audit fees; audit report lag; audit firm rotation; audit delay; industry specialist

JEL Classification: M41, M42

Suggested Citation

Sharma, Divesh Shankar and Tanyi, Paul and Litt, Barri, Costs of Mandatory Periodic Audit Partner Rotation: Evidence from Audit Fees and Audit Timeliness (August 4, 2016). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2818569

Divesh Shankar Sharma (Contact Author)

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

Paul Tanyi

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

9201 University City Blvd
Charlotte, NC 28223
United States

Barri Litt

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

Ft. Lauderdale, FL 33314
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,172
PlumX Metrics