Audit Retendering and Mandatory Auditor Rotation

62 Pages Posted: 5 Sep 2019 Last revised: 24 Sep 2019

See all articles by Mingcherng Deng

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Jing Li

The University of Hong Kong - Faculty of Business and Economics

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: August 29, 2019

Abstract

Building on an auction model, we examine the economic consequences of audit retendering, under which the incumbent auditor in auction possesses both an information advantage and knowledge advantage over outside auditors. Audit retendering allows the firm to retain the incumbent auditor with positive probability, but expect to pay information rent to the incumbent auditor due to his information advantage over outside auditors. In equilibrium, auditor switching (or no switching) under audit retendering conveys additional information to investors, and therefore the informativeness of the audit report under audit retendering is always greater than that under mandatory auditor rotation. We identify conditions under which client firms may benefit from audit retendering. Our findings shed light on the recent European Union Audit Reform, which adopts audit retendering as an alternative to auditor rotation, and have implications to the Public Company Accounting Oversight Board, which are evaluating the proposed mandatory auditor rotation.

Keywords: Audit Retendering; Auditor Rotation; Audit Fee; Audit Quality; EU Audit Reform

JEL Classification: M41, M49

Suggested Citation

Deng, Mingcherng and Li, Jing and Simunic, Dan A. and Zhou, Nan, Audit Retendering and Mandatory Auditor Rotation (August 29, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-09-02. Available at SSRN: https://ssrn.com/abstract=3444676 or http://dx.doi.org/10.2139/ssrn.3444676

Mingcherng Deng

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Jing Li (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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