Determinants and Career Consequences of Early Audit Partner Rotations

Center for Financial Studies Working Paper No. 676, 2021

56 Pages Posted:

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); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); CESifo Research Network

Date Written: October 20, 2021

Abstract

We examine how often and why some audit partners rotate off client engagements before the end of the maximum five-year cycle period. Specifically, we investigate whether audit quality issues play a role for engagement partners and clients to separate prematurely. For a sample of about 4,000 within-audit firm partner rotations for Big 6 clients over the 2008 to 2014 period, we find that client characteristics such as financial leverage or performance have little explanatory power. In contrast, severe audit quality issues such as financial restatements or PCAOB inspection findings are associated with early partner rotations. These associations are more pronounced for early rotations that are not explained by scheduled retirements, promotions, or temporary leaves as well as for large clients and when partners are less experienced. We also find that female partners have a higher likelihood of early rotation for audit quality reasons. Early rotations have career consequences. Partners are assigned to fewer SEC issuer clients, manage fewer audit hours, receive lower partner ratings, and are more likely to be internally inspected after being rotated early. Our results suggest that audit quality concerns are an important factor for early partner rotations with ensuing negative career consequences for partners’ client assignments and management responsibilities.

Keywords: J01, J44, L84, M21, M42

JEL Classification: auditor rotation, audit quality, audit partners, career development, audit industry, PCAOB

Suggested Citation

Gipper, Brandon and Hail, Luzi and Leuz, Christian, Determinants and Career Consequences of Early Audit Partner Rotations (October 20, 2021). Center for Financial Studies Working Paper No. 676, 2021, Available at SSRN: https://ssrn.com/abstract=

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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