Close auditor-client relationships: adverse effects and the potential mitigating role of partner rotation

Abstract

PurposeThis paper aims to investigate whether close auditor-client relationships affect audit quality over the tenure of the audit partner and the potential role of partner rotation in mitigating this effect.Design/methodology/approachUsing the Chinese mandatory audit partner rotation setting, the authors identify the existence of a close auditor-client relationship if the audit partner tenure with a client is larger than the audit firm tenure with that client. The sample period (1998–2009) is divided into voluntary and mandatory rotation periods when examining the effects of audit partner tenure on audit quality for the normal and close auditor-client relationship subsamples, respectively. The authors also conduct a propensity score matching analysis to address a selection issue.FindingsThe paper finds that under the voluntary partner rotation regime, audit quality decreases with audit partner tenure for the subsample with close auditor-client relationships, whereas this effect is not shown in the normal relationship subsample. However, audit quality no longer declines with audit partner tenure under the mandatory partner rotation regime.Originality/valueThis is the first study that directly examines the effect of audit partner tenure on audit quality associated with close auditor-client relationships under the voluntary and mandatory partner rotation regimes.