Network Analysis of Audit Partner Rotation

61 Pages Posted: 20 Dec 2017 Last revised: 21 Nov 2018

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)

Donghui Wu

The Chinese University of Hong Kong

Date Written: November 15, 2018

Abstract

Although mandatory audit partner rotation has become prevalent worldwide, prior empirical research seldom considers the role that rotated-off incumbent partners play in shaping the selection of their successors. 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 incumbent partners are more likely to prefer familiar partnersevident in prior teamwork experienceas successors. Further, this phenomenon is more pronounced when the client is more attractive to the incumbent partner, the engagement information is more complex, and there is a lack of alternative channels to transfer client information to the successor. These results are consistent with both the client retention incentive and the information transfer incentive. Reinforcing the above interpretations, we find that post-rotation audit quality improves and engagements are more likely to be rotated back to the incumbent partner later when the successor partner is familiar with the incumbent. This evidence enriches our understanding of the production of audit services in audit firms and 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 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

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

Shatin, N.T.
Hong Kong
Hong Kong

Donghui Wu (Contact Author)

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

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

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