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    Costs of Mandatory Periodic Audit Partner Rotation: Evidence...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.03 Partner Rotation 
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    Title:
    Costs of Mandatory Periodic Audit Partner Rotation: Evidence from Audit Fees and Audit Timeliness
    Practical Implications:

    These findings provide valuable insight on the implications of mandatory periodic audit partner rotation in the U.S. First, partner rotation has an adverse effect as it increases both audit fees and audit timeliness. Second, the incremental costs of partner rotation are felt more by non-Big 4 city industry non-specialist auditors and their clients. Third, the results suggest these audit fees and audit report lag implications are similar for the second and third incoming audit partners following rotation. 

    Citation:

    Sharma, D. S., P. N. Tanyi, and B. A. Litt. 2017. Costs of Mandatory Periodic Audit Partner Rotation: Evidence from Audit Fees and Audit Timeliness. Auditing: A Journal of Practice and Theory 36 (1): 129 – 149. 

    Keywords:
    partner rotation, partner change, audit fees, audit report lag, audit firm rotation, audit delay, and industry specialist.
    Purpose of the Study:

     The authors examine how mandatory periodic audit partner rotation in the U.S. is related to audit fees and audit timeliness. They also examine how the preceding association varies by audit firms size, client size, and audit office industry specialization. Finally, they examine if partner rotation effects on audit fees and audit report lag persist over successive partner rotations. The SEC tightened partner rotation regulations in the Sarbanes-Oxley Act of 2002 with the hopes of quicker turnover bringing a fresh perspective to, and enhancing the independence, of the audit. The accounting profession opposed the new rules, arguing that, in addition to deterioration in audit quality, there would be significant effects on audit costs and effort, learning and training costs, loss of client-specific expertise, and inefficiencies affecting both the client and auditor. To the knowledge of the authors, there had been no empirical evidence that examined the impact of partner rotation on audit production under the mandatory rotation regime at the time this article was written. 

    Design/Method/ Approach:

    The authors draw upon and utilize a method to identify partner rotation in the U.S. following Litt et al. (2014); however, they extend this study by also examining if the audit cost effects of partner rotation persist over successive audit partner rotations. The authors design tests to examine if partner rotation costs persist at each rotation, and if client-specific knowledge at the audit firm level could potentially mitigate loss of client-specific knowledge and partner rotation costs at the partner level. This design provides a relatively long-term perspective on the consequences of a series of partner rotations and addresses some challenges to partner rotation studies. 

    Findings:
    • The authors find a positive and significant association between partner rotation and audit fees.
      • When the sample is segregated by auditor size and client size, they find significant positive associations for larger clients and non-Big 4 audit firms.
    • The audit timeliness results also show a positive and significant association between audit partner rotation and audit report lag for the full sample.
    • Similar to the audit fee results, the authors detect a significant and positive association between partner rotation and audit report lag for clients of city industry non-specialist auditors.
    Category:
    Audit Team Composition
    Sub-category:
    Partner Rotation