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

79 Pages Posted: 16 Dec 2018 Last revised: 16 Jan 2019

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 24, 2018

Abstract

We provide 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 with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with the former, little support for fresh-look benefits after five-year mandatory 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. 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 or audit team switches and early partner rotations. We show that these situations are more disruptive and more likely to exhibit audit quality effects. In particular, we find that low quality audits give rise to early engagement partner rotations and in this sense have (career) consequences for partners.

Keywords: Auditing, Audit fees, Audit quality, Auditor rotation, Audit partner tenure, Competition, PCAOB

JEL Classification: J01, J44, L84, M21, M42

Suggested Citation

Gipper, Brandon and Hail, Luzi and Leuz, Christian, On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data (November 24, 2018). Center for Financial Studies Working Paper No. 608; Stanford University Graduate School of Business Research Paper No. 19-7. Available at SSRN: https://ssrn.com/abstract=3289927 or http://dx.doi.org/10.2139/ssrn.3289927

Brandon Gipper

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 (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

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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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