Mandatory Audit-Partner Rotation, Audit Quality and Market Perception: Evidence from Taiwan

50 Pages Posted: 9 May 2005

See all articles by Wuchun Chi

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting

Huichi Huang

Oregon State University - College of Business

Yichun Liao

National Chengchi University

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Date Written: April 2005

Abstract

We examine the effectiveness of mandatory audit-partner rotation in promoting audit quality using audit data in Taiwan where a five-year audit-partner rotation became de facto mandatory in 2004. Using both absolute and signed abnormal accruals and abnormal working capital accruals as proxies for audit quality, we find some evidence that audit quality of companies subject to mandatory audit-partner rotation in 2004 is higher than audit quality of companies not subject to rotation in 2004. However, audit quality of companies subject to mandatory rotation in 2004 is lower than audit quality of these same companies in 2003 under the old audit partners. Furthermore, audit quality of companies subject to mandatory rotation in 2004 is indistinguishable from audit quality of companies whose audit partners were voluntarily rotated before 2003. Therefore, the effect of mandatory audit-partner rotation on audit quality, in terms of auditors constraining management's extreme income-increasing or extreme income-decreasing accruals, is mixed. In contrast, using earnings response coefficients as a proxy for investor perceptions of audit quality, we consistently find that investors perceive mandatory audit-partner rotation as enhancing audit quality, suggesting that mandatory audit-partner rotation enhances auditor independence in appearance.

Keywords: Mandatory audit-partner rotation, Auditor-tenure, Audit quality, Perceptions of audit quality

JEL Classification: M41, M49

Suggested Citation

Chi, Wuchun and Huang, Huichi and Liao, Yichun and Xie, Hong, Mandatory Audit-Partner Rotation, Audit Quality and Market Perception: Evidence from Taiwan (April 2005). Available at SSRN: https://ssrn.com/abstract=717421 or http://dx.doi.org/10.2139/ssrn.717421

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan 116, Taipei
Taiwan
886-2-29393091-81031 (Phone)
886-2-29387113 (Fax)

HOME PAGE: http://www3.nccu.edu.tw/~wchi/

Huichi Huang

Oregon State University - College of Business ( email )

224D Bexell Hall
Corvallis, OR 97331
United States

Yichun Liao

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Hong Xie (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

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