Mandatory Audit Partner Rotations and Audit Quality in the United States

Auditing: A Journal of Practice & Theory, 2020, Vol. 39, No. 3, 161-184

48 Pages Posted: 28 Jan 2022

See all articles by Huan Kuang

Huan Kuang

University of Massachusetts Amherst - Department of Finance

Huimin Li

University of New Hampshire - Department of Accounting & Finance

Matthew Sherwood

University of Massachusetts Amherst - Isenberg School of Management

Robert Lowell Whited

North Carolina State University

Abstract

This study uses a sample of mandatory partner rotation events hand-collected from SEC filings to investigate the relation between mandatory audit partner rotation and audit quality in the United States. Across a variety of control groups and audit quality proxies, we do not find evidence consistent with rotation materially improving audit quality (i.e., “fresh look”). Though somewhat limited, the only statistically significant evidence we document suggests that audited financial statements may be more likely to contain a material misstatement (i.e., subsequently be restated) following a mandatory audit partner rotation, particularly when the audit firm tenure is short. We also provide evidence from client disclosures that mandatory rotation rules trigger auditor-client realignment. Together, our results provide important evidence on the merits of mandatory partner rotation rules in the United States.

Keywords: U.S. mandatory audit partner rotations, material misstatements, audit quality

JEL Classification: M40, M41, M42

Suggested Citation

Kuang, Huan and Li, Huimin and Sherwood, Matthew and Whited, Robert Lowell, Mandatory Audit Partner Rotations and Audit Quality in the United States. Auditing: A Journal of Practice & Theory, 2020, Vol. 39, No. 3, 161-184, Available at SSRN: https://ssrn.com/abstract=4015561

Huan Kuang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003-4910
United States
6782321021 (Phone)
03861 (Fax)

Huimin Li

University of New Hampshire - Department of Accounting & Finance ( email )

Durham, NH 03824
United States

Matthew Sherwood

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Robert Lowell Whited (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695
United States

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