On the economics of audit partner tenure and rotation : evidence from PCAOB data

  • We provide the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with the former, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. Our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm or audit team switches and early partner rotations. We show that these situations are more disruptive and more likely to exhibit audit quality effects. In particular, we find that low quality audits give rise to early engagement partner rotations and in this sense have (career) consequences for partners.

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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. 608
Series (Serial Number):CFS working paper series (608)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Year of Completion:2018
Year of first Publication:2018
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2018/11/29
Tag:Audit fees; Audit partner tenure; Audit quality; Auditing; Auditor rotation; Competition; PCAOB
Issue:June 2018
Page Number:79
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