Empirical Evidence on Audit Quality Under a Dual Mandatory Auditor Rotation Rule

Forthcoming at European Accounting Review

48 Pages Posted: 10 Apr 2020

See all articles by Joanne Horton

Joanne Horton

University of Warwick - Warwick Business School

Gilad Livne

University of Exeter Business School

Angela Kate Pettinicchio

SDA Bocconi School of Management

Date Written: March 22, 2020

Abstract

Regulators in the US ruled against introducing mandatory firm rotations in addition to the existing rule for periodic partner rotations. In contrast, European regulators ruled in favour of a dual mandatory rotation rule in which both audit firm and audit partner rotations are required. Employing a unique setting where a dual regime of audit and firm rotations are required, we assess the net benefit (cost), of audit firm rotation incrementally to partner rotation. Specifically, we analyse several earnings-based measures of audit quality along with the market perception of audit quality. Controlling for partner rotation, we do not find that firm rotations have a positive incremental effect. In contrast, we find audit partner rotation under the dual regime appears to improve both the earnings-based measures of audit quality, and market perceptions of earnings. Our evidence suggests that any benefit arising from dual rotation is likely to be driven by the change in partner. However, whether the audit firm rotation should still be required is unclear, given that the observed benefits arising from the audit partner rotation could potentially be preconditioned on audit firm rotation.

Keywords: audit-firm rotations, audit-partner rotations, audit quality, investor perceptions

JEL Classification: M42

Suggested Citation

Horton, Joanne and Livne, Gilad and Pettinicchio, Angela Kate, Empirical Evidence on Audit Quality Under a Dual Mandatory Auditor Rotation Rule (March 22, 2020). Forthcoming at European Accounting Review, Available at SSRN: https://ssrn.com/abstract=3558875 or http://dx.doi.org/10.2139/ssrn.3558875

Joanne Horton

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Gilad Livne

University of Exeter Business School ( email )

Streatham Court
Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

Angela Kate Pettinicchio (Contact Author)

SDA Bocconi School of Management ( email )

Via Sarfatti 10
Milan, 20136
Italy

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