Mandatory Audit Partner Rotations and Audit Quality in the United States

Abstract

SUMMARYThis study uses a sample of mandatory partner rotation events hand collected from SEC filings to investigate the relation between mandatory audit partner rotation and audit quality in the United States. Across a variety of control groups and audit quality proxies, we do not find evidence consistent with rotation materially improving audit quality (i.e., “fresh look”). Although somewhat limited, the only statistically significant evidence we document suggests that audited financial statements may be more likely to contain a material misstatement (i.e., subsequently be restated) following a mandatory audit partner rotation, particularly when the audit firm tenure is short. We also provide evidence from client disclosures that mandatory rotation rules trigger auditor-client realignment. Together, our results provide important evidence on the merits of mandatory partner rotation rules in the United States.JEL Classifications: M40; M41; M42.Data Availability: Data are publicly available from sources identified in the article.