Auditor rotation versus audit partner rotation

: an examination of audit quality, audit pricing and audit report lag in Australia

Abstract

This study investigates the effect of audit partner and audit firm rotation on audit quality, audit pricing and audit report timeliness which are measured by the absolute value of discretionary accruals, audit fees and number of days between year ends and audit report dates respectively in a voluntary regime. Using data from Australian audit market where each audit report discloses the name of the only audit engagement partner, I first replicate and modify tests in prior studies and find that the generally observed positive association between audit firm tenure and audit quality disappears when there is audit partner rotation. Then, I introduce two dummies for audit partner and firm rotation in the regressions. My results show the following. (1) There are no significant differences in audit quality between engagements with audit partner rotation and those with audit firm rotation. (2) Audit quality of engagements with audit partner rotation is also not significantly different from that without any rotation. (3) Audit fees of engagements with audit partner rotation are significantly different from those with audit firm rotation only if the confounding effect of low-balling practice is not controlled for. (4) Audit engagements with audit partner rotation are charged significantly higher audit fees than ongoing engagements. On the other hand, the results of audit timeliness show that, contrary to the start-up time hypothesis, audit partner rotation and lateral audit firm rotation do not affect audit report lags (ARL) significantly. Nor does cross-down audit firm rotation have any significant effect. Nevertheless, a positive and significant association between cross-up audit firm rotation and ARL is observed. Thus, the realignment hypothesis seems to play a more influential role in ARL determination comparing with the start-up time and auditor-timeliness difference hypotheses. Taken collectively, the empirical tests provide evidence that does not support audit partner and audit firm rotation policies that are being espoused by regulators around the world to boost up audit quality.

Date of Award	14 Jul 2006
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Charles J P CHEN (Supervisor) & Kam Wah LAI (Supervisor)