Determinants and career consequences of early audit partner rotations

  • 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.

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Author:Brandon Gipper, Luzi Hail, Christian LeuzORCiDGND
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 676
Series (Serial Number):CFS working paper series (676)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Year of Completion:2021
Year of first Publication:2021
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/01/10
Tag:PCAOB; audit industry; audit partners; audit quality; auditor rotation; career development
Issue:October 2021
Page Number:56
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht