Does Mandatory Audit Partner Rotation Influence Auditor Selection Strategies?

Abstract

Under mandatory rotation, the switching cost may be the most influential factor to be considered for experienced mandatory audit rotations. This study attempts to explore the impacts of the mandatory rotation mechanism on company information disclosure and signaling strategies by examining the audit partner and audit firm switching activities of the mandatory rotation company. Are companies that experience mandatory audit rotation more likely to engage industry specialist auditors with better industry-specific knowledge and reputations to minimize the costs of mandatory rotations? Furthermore, in the case of being required to rotate audit partners, do companies rotate only audit partners, rather than changing both audit partners and audit firms at the same time, to minimize switching costs? To explore these problems, this study examined auditor rotations of listed companies in Taiwan from 2004 to 2016; and expected that, to minimize switching costs, mandatory rotation companies are more likely to select industry specialist auditors to be their successor auditors, and are less likely to rotate audit partners and audit firms at the same time. For the audit partner rotations, we find that, compared to voluntarily rotated companies, a higher percentage of companies choose industry specialist auditors to be their successor audit partners under mandatory rotation. Furthermore, the empirical results support our expectations that companies that experience mandatory audit partner rotation are significantly more likely to engage industry specialists to be their successor audit partners and are more likely to rotate only audit partners rather than rotating both audit partners and audit firms around mandatory audit rotation periods.