An Examination of Partner Perceptions of Partner Rotation: Direct and Indirect Consequences to Audit Quality

Abstract

SUMMARY Using structured interviews and surveys of practicing audit partners, this study examines their perceptions with regard to mandatory partner rotation and cooling-off periods, and how recently enacted, more stringent rules, may negatively impact auditors' quality of life to the detriment of audit quality. Results suggest rotation, in general, increases partners' workloads and the likelihood of relocation. Additionally, results suggest that in response to accelerated rotation (and an extended cooling-off period), partners would rather learn a new industry than relocate. Importantly, partners perceive audit quality suffers from retraining, but not from relocating. Thus these results suggest an indirect, negative impact, and unintended consequence, of accelerated rotation/extended cooling-off periods on audit quality. Data Availability: The survey instrument is available upon request. Individual audit partner responses are confidential.

The effect of inspections, rotations and client preferences on staffing decisions

“…When a partner is to be rotated, increased accountability may arise from having a new partner in charge but the focus of that accountability could shift to smoothly managing the transition from one partner to the next so as to not disrupt the auditor-client relationship (Daugherty et al, 2012). When a partner is to be rotated, increased accountability may arise from having a new partner in charge but the focus of that accountability could shift to smoothly managing the transition from one partner to the next so as to not disrupt the auditor-client relationship (Daugherty et al, 2012).…”

“…Audits are subject to greater scrutiny than in the past. Further, the requirement to rotate audit partners to enhance independence is creating challenges for audit firms as it has the potential to disrupt the conduct of an audit and detrimentally impact knowledge of a client (Daugherty et al, 2012). Inspections (PCAOB, 2012;ASIC, 2014) are having an effect on various measures of audit quality (Gramling et al, 2011;Lamoreaux, 2013) because inspectors have access to auditors' files and can hold those auditors accountable for their work (Peecher et al, 2013;Johnson et al, 2014).…”

“…When an inspection is anticipated, the likelihood of being held accountable for the quality of the audit working papers increases and there is an incentive to allocate staff with appropriate skills to enhance the probability that the regulator will issue a clean report on the audit file (Johnson et al, 2014). When an audit is up for partner rotation, the client is more likely to become the focus because the audit firm needs to maintain a good relationship with the client during the transition from one partner to the next (Fargher et al, 2008;Daugherty et al, 2012). When an audit is up for partner rotation, the client is more likely to become the focus because the audit firm needs to maintain a good relationship with the client during the transition from one partner to the next (Fargher et al, 2008;Daugherty et al, 2012).…”

Does the Rotation of Head of Audit Office Across Offices Impact Audit Quality? Study Case of the Audit Board of Republic of Indonesia

“…Rotation across office sizes is a topic that has rarely been examined in prior studies, due to the lack of rotation data. This is because audit partners in private sector prefer to learn a new industry rather than being rotated through other offices (Daugherty et al 2012). In contrast, in the Audit Board of Republic of Indonesia (BPK RI), mandatory auditor rotation is performed across different office sizes.…”

“…Second, the audit partners' new clients may be in a different industry to their previous clients, similar to a vertical promoted HRO in this study. The audit partners' preferences to learn a new industry instead of rotating to other offices have been documented by Daugherty et al (2012). Therefore, these audit partners also experience the negative effect of auditor rotation.…”