201409XiWuDoesMandatory Rotation of Audit Partners Improve Audit Quality

THEACCOUNTINGREVIEW

Vol.89,No.5

2014

pp.1775–1803AmericanAccountingAssociationDOI:10.2308/accr-50800

DoesMandatoryRotationofAuditPartners

ImproveAuditQuality?

CliveS.Lennox

NanyangTechnologicalUniversity

XiWu

CentralUniversityofFinanceandEconomics

TianyuZhang

TheChineseUniversityofHongKong

ABSTRACT:Opponentsofmandatoryrotationarguethatachangeofpartnerisbadfor

auditquality,asitresultsinalossofclient-specificknowledge.Ontheotherhand,

proponentsarguethatachangeofpartnerisbeneficial,asitresultsinapositivepeer

revieweffectandafreshperspectiveontheaudit.Wetesttheimpactofmandatory

partnerrotationonauditqualityusingauniquedatasetofauditadjustmentsinChina.

Ourresultssuggestthatmandatoryrotationofengagementpartnersresultsinhigher

qualityauditsintheyearsimmediatelysurroundingrotation.Specifically,wefinda

significantlyhigherfrequencyofauditadjustmentsduringthedepartingpartner’sfinal

yearoftenurepriortomandatoryrotationandduringtheincomingpartner’sfirstyearof

tenurefollowingmandatoryrotation.

Keywords:mandatoryrotation;auditpartners;auditquality;auditadjustment.

I.INTRODUCTION

Manyjurisdictionsimposelimitationsonthelengthofauditpartnertenure,buttheyimpose

nolimitationsonthelengthofaudit rmtenure.Forexample,auditpartnersaresubjectto

mandatoryrotationinArgentina,Australia,Belgium,China,Denmark,France,Germany,

HongKong,Mexico,TheNetherlands,NewZealand,Norway,Russia,Taiwan,theUnitedKingdom,

andtheUnitedStates,butnoneofthesejurisdictionsrequiretherotationofaudit rms.Despitethe

WethankMichaelL.Ettredge(editor),JohnHarryEvansIII(senioreditor),andtwoanonymousreviewersfortheir

helpfulcomments.WealsoappreciatecommentsreceivedfromLindaBamber,JoeCarcello,Chih-YingChen,Agnes

Cheng,TerryNeal,QianweiYing,andworkshopparticipantsatHongKongBaptistUniversity,LingnanUniversity,

NanyangTechnologicalUniversity,TheUniversityofGeorgia,TheUniversityofTennessee,andthe2013

MassachusettsInstituteofTechnologyAsiaConferenceinAccounting(Shanghai).XiWuthankstheInspection

BureauoftheChineseMinistryofFinanceforprovidingdatasupport.CliveLennoxthanksSingapore’sMinistryof

Educationforprovidingresearchfunding(MOE2012-T2-2-039).

Editor’snote:AcceptedbyMichaelL.Ettredge.

Submitted:November2012

Accepted:April2014

PublishedOnline:April2014

1775

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