On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data

77 Pages Posted: 13 Nov 2017

See all articles by Brandon Gipper

Brandon Gipper

Stanford University Graduate School of Business

Luzi Hail

University of Pennsylvania - The Wharton School

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Multiple version iconThere are 3 versions of this paper

Date Written: November 2017

Abstract

This paper provides the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs related to partner tenure and rotation with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and little support for fresh-look benefits after rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. More generally, our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm switches and early partner rotations, and show that they are more disruptive than mandatory rotations, and also more likely to exhibit audit quality effects.

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Suggested Citation

Gipper, Brandon and Hail, Luzi and Leuz, Christian, On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data (November 2017). NBER Working Paper No. w24018. Available at SSRN: https://ssrn.com/abstract=3070042

Brandon Gipper (Contact Author)

Stanford University Graduate School of Business ( email )

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Luzi Hail

University of Pennsylvania - The Wharton School ( email )

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Christian Leuz

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European Corporate Governance Institute (ECGI)

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Center for Financial Studies (CFS) ( email )

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University of Pennsylvania - Wharton Financial Institutions Center

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CESifo Research Network

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