Network Analysis of Audit Partner Rotation
61 Pages Posted: 20 Dec 2017 Last revised: 21 Nov 2018
Date Written: November 15, 2018
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 partnersevident in prior teamwork experienceas 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: Suggested Citation