Mandatory Audit Partner Rotation, Audit Quality, and Market Perception: Evidence from Taiwan*

Mandatory Audit Firm Rotation and Big4 Effect on Audit Quality: Evidence from South Korea

“…Previous mandatory auditor rotation studies suggest that there are significant costs that outweigh the benefits of a "fresh look" by a new audit firm (Johnson, Khurana, & Reynolds, 2002;Myers, Myers, & Omer, 2003;Blouin, Grein, & Rountree, 2007). Chi, Huang, Liao and Xie (2009) examine the effect of mandatory partner rotation on audit quality in Taiwan, employing absolute abnormal accruals as proxies for audit quality, and the earnings response coefficient as a proxy for perceived audit quality. They find no evidence that mandatory audit partner rotation enhances audit quality.…”

“…They find no evidence that mandatory audit partner rotation enhances audit quality. Our study differs from Chi et al (2009) by directly comparing the audit quality of firms that promulgate the mandatory audit "firm" policy after a period of mandatory audit "partner" rotation. Thus, Korea's unique regulatory system enables us to make inferences about which sample has the highest levels of audit quality, mandatory audit "partner" or "firm" rotation.…”

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

“…However, some scholars have investigated more general aspects, such as the capability of partner rotation to positively affect earnings quality. For instance, Chi et al (2009) investigate the effectiveness of mandatory audit partner rotation in promoting audit quality in Taiwan, using both abnormal accruals and earnings response coefficients as a proxy for audit quality. Although their findings suggest that the audit quality of entities subject to mandatory audit-partner rotation in 2004 is higher than the audit quality of companies not subject to rotation in 2004, they find no difference between the audit quality of firms that experienced a mandatory rotation and that of those clients not subject to mandatory rotation or those whose audit partners rotated voluntarily.…”

“…Although their findings suggest that the audit quality of entities subject to mandatory audit-partner rotation in 2004 is higher than the audit quality of companies not subject to rotation in 2004, they find no difference between the audit quality of firms that experienced a mandatory rotation and that of those clients not subject to mandatory rotation or those whose audit partners rotated voluntarily. 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).…”

“…The second objective of this paper is to verify whether audit firm rotation and partner rotation could be considered substitutes in affecting the value relevance of accounting amounts. To formulate a plausible research hypothesis, we have to consider rotations like signals to be useful to increase the public's confidence in audited financial statements and to rekindle a national debate on auditor independence and audit quality (Chi et al, 2009). According to the theoretical framework of Spence (1973), signals are observable characteristics attached to an individual that are subject to manipulation by that individual.…”