Audit Retendering Versus Auditor Rotation

Posted: 10 Aug 2017

See all articles by Mingcherng Deng

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: August 8, 2017

Abstract

There has been public debate among regulators over the introduction of audit retendering as a substitute for auditor rotation. We show that under audit retendering, client firms may retain the incumbent auditor's specific knowledge, but expect to pay higher audit fees to compensate the incumbent auditor for its information advantage over outside auditors. However, the expected information content of the audit reports under audit retendering is always greater than that under auditor rotation, because the observation of auditor switching (or not switching) under audit retendering conveys additional information to investors. The auditor switching information, absent under auditor rotation, reduces the cost of equity financing. With this trade-off, we identify conditions under which client firms may benefit from audit retendering. This unique insight could help PCAOB determine whether to adopt mandatory auditor rotation in the U.S. The focus on audit retendering distinguishes our paper from extant studies on mandatory auditor rotation.

Keywords: Audit Retendering, Auditor Rotation, Audit Fee, European Union

JEL Classification: M41, M48

Suggested Citation

Deng, Mingcherng and Simunic, Dan A. and Zhou, Nan, Audit Retendering Versus Auditor Rotation (August 8, 2017). Available at SSRN: https://ssrn.com/abstract=3015668

Mingcherng Deng (Contact Author)

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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