Does Mandatory Rotation of Audit Partners Improve Audit Quality?

Lennox, Clive S.; Wu, Xi; Zhang, Tianyu

doi:10.2308/accr-50800

Cited by 274 publications

(250 citation statements)

References 45 publications

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“…This conclusion led Bamber and Bamber (2009) to consider Chi et al (2009) a "no-result" paper, which, nevertheless, made a significant contribution to the accounting literature. More recently, Lennox et al (2014) find that mandatory rotation of engagement partners results in high quality audits in the years immediately following rotation, supporting the thesis that the pros of partner rotation on audit quality (positive peer review effect and a fresh perspective on the audit) outweigh the cons (loss of client-specific knowledge).…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 52%

“…In the accounting literature, scholars have investigated the ability of the different information contained in the auditing report to affect audit quality (e.g., Manry et al, 2008;Lennox et al, 2014) or financial reporting quality (Litt et al, 2014), providing different arguments justifying results that, in many cases, contradict each other. A limited number of studies deepen the contribution that such information provides to the weight that investors place on accounting amounts.…”

Section: Introductionmentioning

confidence: 99%

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Do (Audit Firm and Key Audit Partner) Rotations Affect Value Relevance? Empirical Evidence from the Italian Context

Mechelli¹,

Cimini²

2016

IBR

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This research aims to investigate whether and to what extent investors place more weight on accounting amounts disclosed in annual reports issued by entities that experienced a rotation of the audit firm or of the key audit partner. Analysing a sample of 97 non-financial entities listed in the Milan stock exchange over the period 2006-2014, the paper provides evidence that rotations positively affect the value relevance of accounting amounts. In addition, the paper shows how the audit firm rotation and the key partner rotation act only in part as substitutes, as the former is more capable than the latter of positively affecting the value relevance of earnings and book value. These results provide a theoretical contribution to the literature and have significant implications for standard setters. The rotations, even though could determine a loss of client-specific knowledge, nonetheless improve the value relevance of accounting amounts. New rules that require the key partner rotation have a positive effect as long as they do not consider such rotation as an alternative to the rotation of the audit firm being the partner rotation less capable to affect the value relevance of accounting amounts than the key audit firm rotation.

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Section: Literature Review and Hypotheses Developmentmentioning

confidence: 52%

Section: Introductionmentioning

confidence: 99%

Do (Audit Firm and Key Audit Partner) Rotations Affect Value Relevance? Empirical Evidence from the Italian Context

Mechelli¹,

Cimini²

2016

IBR

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“…On the other hand, there is contrary evidence (but not from audit fee studies) showing higher audit quality after a switch (Lennox, Wu, and Zhang 2014;Kim, H. Lee, and J. Lee 2015). Lennox et al (2014) found evidence that first-year audits were of higher quality in China, and Kim et al (2015) also found evidence of higher quality at first, after auditor switches in Korea.…”

Section: Lowballingmentioning

confidence: 76%

“…Lennox et al (2014) found evidence that first-year audits were of higher quality in China, and Kim et al (2015) also found evidence of higher quality at first, after auditor switches in Korea.…”

Section: Lowballingmentioning

confidence: 94%

Audit Fee Research on Issues Related to Ethics

Hay

2017

Current Issues in Auditing

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SUMMARY Audit fees are related to important ethical issues for auditors. There has been increasing research on audit fees recently, including research on potential ethical risks regarding audit fees, which helps to illuminate some of these professional issues. The International Ethics Standards Board for Accountants (IESBA) is very interested in this area and asked me to prepare a paper reviewing the relevant research. This summary reviews research that became available from 2006 to 2016 on four issues related to audit fees—fee level, dependence, non-audit fees, and firms that have a significant non-audit services business. Examining the research shows consistent evidence about two issues, namely that audit fees for new engagements are lower and that non-audit services affect independence in appearance. There are two further issues about which there is some concern. First, there are occasional studies reporting evidence that non-audit services provided by an auditor are associated with a loss of independence indicated by lower audit quality, even though most research does not support this conclusion. Second, there has been recent concern about growth in non-audit services to non-audit clients and there is some preliminary evidence that audit quality is lower in firms that have more extensive non-audit businesses. In general, although audit fee research does not convey a message that there are widespread ethical problems, the body of research shows that there are some risk areas.

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“…3 Studies use the EP identification to document that individual engagement partners' tenure and rotation are related to perceived audit quality (e.g., Azizkhani, Monroe, and Shailer 2013;Lennox, Wu, and Zhang 2014). The researchers suggest that mandatory rotation of engagement partner leads to higher quality audits in the years immediately surrounding rotation.…”

Section: Introductionmentioning

confidence: 99%

Economic Consequences of Implementing the Engagement Partner: Signature Requirement in the UK

Liu¹

2017

IBR

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This paper examines whether and the extent to which requiring the audit engagement partner (EP) signature influences on information asymmetry, analysts' forecast errors, and forecast dispersion. I predict and find that, ceteris paribus, there is a significant decline in information asymmetry, analysts' forecast errors and forecast dispersion from the pre-to post-EP signature period in the UK over both of short-term (i.e., 2008-2010) and long-term (i.e., 2004-2014). These findings hold when using a control sample approach, indicating that my results are not likely due to the effect of concurrent events and correlated omitted variables. These findings suggest that implementing the EP signature requirement benefits analysts forecasts over a short-and long-term.

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Does Mandatory Rotation of Audit Partners Improve Audit Quality?

Cited by 274 publications

References 45 publications

Do (Audit Firm and Key Audit Partner) Rotations Affect Value Relevance? Empirical Evidence from the Italian Context

Do (Audit Firm and Key Audit Partner) Rotations Affect Value Relevance? Empirical Evidence from the Italian Context

Audit Fee Research on Issues Related to Ethics

Economic Consequences of Implementing the Engagement Partner: Signature Requirement in the UK

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