The consequences of mandatory rotation appear to be (1) higher audit fees, and (2) lower-quality audited earnings following rotation (which is consistent with the evidence in non-mandatory settings). The authors conclude with some conjectures on how the negative effects of mandatory rotation observed in Italy might be even greater in countries with larger audit markets and larger clients, such as the United States and other European Union countries, which should give regulators pause. Another unintended consequence of mandatory rotation in the United States would be to reduce an audit firm’s industry expertise. A rotation rule in the United States and other large economies could disrupt the market and fundamentally change the way accounting firms are organized for the delivery of audits. 

Cameran, M., Francis, J. R., Marra, A., & Pettinicchio, A. 2015. Are There Adverse Consequences of Mandatory Auditor Rotation? Evidence from the Italian Experience. Auditing: A Journal of Practice & Theory 34 (1): 1-24.

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This study provides the first evidence using U.S. data on the relationships between audit planning and pricing and audit partner tenure. Importantly, the results speak to the requirement in SOX Section 203 that audit partners on public clients rotate every five years. The second set of results concerns changes in auditor risk responsiveness during the period 2002 to 2003. Because there are very few longitudinal studies of engagement effort that feature a consistent sample of clients over time, this study contributes to understanding of changes in audit firms’ risk responsiveness.

Bedard, J. C., and K. M. Johnstone. 2010. Audit Partner Tenure and Audit Planning and Pricing. Auditing: A Journal of Practice & Theory 29 (2): 45-70.

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There are two points of this essay. First, the auditing community can benefit from a more expansive view of auditing without borders, one that considers the commonalities of financial statement audits with other certification practices. Auditors and academics can both learn from and potentially contribute to other research literatures. At the same time, context is also important. That is, the community also needs to examine closely the specific contexts in which auditing and other certification practices take place. In particular the author conjectures that a major cause of the variation in audit quality (and perhaps the quality of other 3rd party certifications as well) is the specific institutional and cultural setting of a particular certification practice, and the effects that these have on the incentives and behavior of certification experts. Very little is known about these contextual effects, even for financial statement audits.

Francis, J. R. 2011. Auditing Without Borders. Accounting, Organizations & Society 36 (4/5): 318-323.

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The study provides helpful insight on auditing and financial reporting public policy issues and initiatives. The report focuses on the roles of the SEC and PCAOB in the setting of standards, convergence of standards, and the formation of a new public oversight regulating body. The author provides her personal perspective on the complications and thought processes behind many of the tasks taken on by the SEC from 2006 - 2008.

For more information on this study, please contact Zoe-Vonna Palmrose (zv.palmrose@marshall.usc.edu).

Palmrose, Z.-V. 2010. 2010. Balancing the Costs and Benefits of Auditing and Financial Reporting Regulation Post-SOX, Part II: Perspectives from the Nexus at the SEC. Accounting Horizons 24 (3):487-507.

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The results of this study are important for audit firms to prepare for the adoption of IFRS and/or less precise standards under U.S. GAAP. The results indicate that a move to less precise standards will not necessarily result in more verdicts against auditors. There is only one condition in which an imprecise standard leads juries to return more verdicts against the auditor: when the client’s reporting complies with the precise standard and is inconsistent with the industry reporting norm. The results suggest that auditors can reduce this liability by ensuring that their client’s reporting is consistent with industry reporting norm.

For more information on this study, please contact Kathryn Kadous.
 

Kadous, K., and M. Mercer. 2012. Can Reporting Norms Create a Safe Harbor? Jury Verdicts against Auditors under Precise and Imprecise Accounting Standards. The Accounting Review 87 (2):565-587.

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