The impact of engagement partner rotation on audit quality in the United States
Matthews, Jason Wylie
MetadataShow full item record
Does audit engagement partner rotation enhance auditor independence and result in improved audit quality? The Sarbanes-Oxley Act of 2002 presumes that it does and mandates partner rotation every five years on public company audits. I investigate the impact that U.S. audit engagement partner rotations from 1990 to 2010 have on audit quality. Assuming that relatively lower levels of absolute performance-matched discretionary accruals reflect higher-quality audits, I find a statistically significant decrease in absolute performance-matched discretionary accruals in the first year of a newly rotated audit partner, when compared to the final year of an outgoing partner, consistent with partner rotation improving audit quality. However, further analysis suggests that the seemingly higher quality audit in the first year of a newly-rotated audit partner is due to abnormally low levels of audit quality provided in the final year of the outgoing “lame duck” audit partner. I find higher levels of absolute performance-matched discretionary accruals in the final year of a lame duck partner compared to all other years of that audit partner’s tenure and no statistical difference between the first year of a newly-rotated audit partner and all other non-rotation years. These findings suggest that a negative consequence of partner rotation is the diminution of audit quality in the final year of a lame duck audit partner.