Network Analysis of Audit Partner Rotation

51 Pages Posted: 20 Dec 2017 Last revised: 20 Mar 2021

See all articles by Jeffrey Pittman

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Lin Wang

The Chinese University of Hong Kong (CUHK); Central University of Finance and Economics (CUFE); The Chinese University of Hong Kong

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

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Date Written: November 15, 2018

Abstract

Although mandatory audit partner rotation has become prevalent worldwide, prior empirical research seldom considers how the successor partners are identified and the economic consequences of different rotation strategies. We examine the importance of internal networks to the selection of successor partners and the underlying incentives in the selection process in China, which affords an opportune testing ground for analyzing our research questions. We find that candidate partners who are familiar with the incumbents—evident in prior teamwork experience—are more likely to be selected as successors. This phenomenon is more pronounced when the audit engagement is more complex, client-specific knowledge is not readily available to the succeeding partner, and the engagement is more attractive to the audit firm. These results are consistent with auditors’ incentive to facilitate information transfer and maintain client satisfaction after the transition. Reinforcing this interpretation, we find that successor–incumbent familiarity is associated with better post-rotation audit-reporting quality and less frequent client defections without undermining the quality of the audited financial statements. Enriching our understanding of the production of audit services in audit firms, our analysis contributes to the public policy discourse on partner rotation.

Keywords: Network; Audit partner rotation; Client retention; Information transfer

JEL Classification: M42; D85; M48

Suggested Citation

Pittman, Jeffrey A. and Wang, Lin and Wang, Lin and Wu, Donghui, Network Analysis of Audit Partner Rotation (November 15, 2018). Available at SSRN: https://ssrn.com/abstract=3087491 or http://dx.doi.org/10.2139/ssrn.3087491

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Lin Wang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

The Chinese University of Hong Kong ( email )

Donghui Wu (Contact Author)

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
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852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

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HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

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