Audit Retendering Versus Auditor Rotation
Posted: 10 Aug 2017
Date Written: August 8, 2017
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: Suggested Citation