Determinants and Career Consequences of Early Audit Partner Rotations

Abstract

We analyze a sample of 3,973 within-audit firm partner rotations for Big 6 issuer clients from 2008 to 2014 and find that partner rotations occurring early—before the end of the maximum five-year term—are associated with major audit quality issues such as financial restatements or PCAOB inspection findings. This link to audit quality is present only for early rotations that are not explained by retirements, promotions, or temporary leaves, and for large clients and less experienced partners. Female partners are more likely to be rotated for audit quality reasons. New incoming partners are more senior and have more time for the engagement. Early rotations have career consequences. Exiting partners are assigned to fewer, less risky SEC issuer clients, manage fewer audit hours, and receive lower partner ratings. Our results suggest that early partner rotations serve an important role for quality control within audit firms.

Keywords: auditor rotation, audit quality, audit partners, career development, audit industry, PCAOB

JEL Classification: J01, J44, L84, M21, M49