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

The Accounting Review 96, no. 2 (2021): 303-331.

Stanford University Graduate School of Business Research Paper

Posted: 9 Aug 2021

See all articles by Brandon Gipper

Brandon Gipper

Stanford University Graduate School of Business

Luzi Hail

University of Pennsylvania - The Wharton School; European Corporate Governance Institute (ECGI)

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 4 versions of this paper

Date Written: March 1, 2021

Abstract

We analyze the effects of partner tenure and mandatory rotation on audit quality, pricing, and production for a large cross-section of U.S. public firms during 2008–2014. On average, we find no evidence that audit quality declines over the tenure cycle and little support for “fresh-look” benefits provided by the new audit partner. Audit fees decline and audit hours increase after mandatory rotation, but then reverse over the tenure cycle. We also find evidence that audit firms use “shadowing” in preparation for a lead partner turnover. These effects differ by competitiveness of the local audit market, client size, and partner experience. When multiple members of the audit team commence work at a new client, the transition appears to be more disruptive and more likely to exhibit audit quality effects. Our findings point to costly efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations.

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 Mandatory Audit Partner Rotation and Tenure: Evidence from PCAOB Data (March 1, 2021). The Accounting Review 96, no. 2 (2021): 303-331., Stanford University Graduate School of Business Research Paper , Available at SSRN: https://ssrn.com/abstract=3899541

Brandon Gipper (Contact Author)

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

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