Retain or Rotate: The Association Between Frequent Auditor Switching and Audit Quality

Abstract

Regulators have long expressed concerns about auditor changes and the detrimental impact of opinion shopping on the audit market. While prior studies have examined how single-instance auditor switching impacts audit outcomes, we examine whether frequent auditor switching impacts audit outcomes. We find that more frequent auditor switching is associated with worse audit quality, but that this effect is mitigated in the presence of higher internal and external monitoring. We also find that frequently switching companies have worse audit quality than companies that switch auditors, but do not frequently switch auditors. Taken together, our evidence indicates that a subset of companies participates in frequent auditor switching and that such behavior is detrimental to the audit market. Our findings can inform regulators and practitioners about some of the ramifications of frequent auditor switching and help inform auditor switching regulations and client acceptance procedures.

Keywords: Audit quality, Audit firm rotation, Auditor changes, Audit opinion, Client acceptance

JEL Classification: M41, M42