Does Mandatory

Rotation of Audit
Partners Improve Audit
Quality?
Clive S. Lennox, Xi Wu, Tianyu Zhang
INTRODUCTION
• Many jurisdictions impose limitations
on the length of audit partner tenure,
but they impose no limitations on the
length of audit firm tenure

• Choose China as empirical setting ;

1. in China the engagement
and review partners have to be
rotated every five years
2. since 2006, audit firms in
China must report the pre-audit
annual profits of all publicly traded
clients to the Ministry of Finance.
What is mandatory rotation of audit partner?
- The company has to change their audit team
every 5 years

When does an audit adjustment occur?

1. A manager misstates the pre audit financial statements
2. The misstatement is detected and corrected by the auditor
Hyphotheses
• H1 : Audit adjustments are more frequent during the
departing partner’s final year of tenure prior to
mandatory partner rotation than in years when audit
partners are not affected by mandatory rotation.

• H2 : Audit adjustments are more frequent during the

replacement partner’s first year of tenure following
mandatory partner rotation than in years when audit
partners are not affected by mandatory rotation.
Research Method
• Use audit adjustment as audit quality
• Use regression to maintain quality of the result
• 6,341 audits sample from 2006-2011
Descriptive Statistics for
mandatory Partner Rotation and
Audit Adjustment
• Panel A Sorted by year (5 years)
• 5.16 percent of partners are in their final years
• 4.59 percent of partners are in their first year
• Panel B Sorted by industries (across 13 industries)
• 6.56 percent of partners are in their final years
• 5.03 percent of partners are in their first year
Finding For Panel A (by Year)
Partner’s Situation Audit adjustmens (%)

Final Year 77.06%

First year 74.91%

Neither of them 66.12%

Finding for Panel B By industry
Partner’s Situation Audit adjustmens (%)

Final Year 66.83%

First year 71.79%

Neither of them 66.85%

Univariate Tests
Result for hypothesis
• The impact of mandatory rotation is economically significant
as statistic
• The engagement partners in their first year of tenure provide
high quality audit
• The engagement partners in their final year of tenure provide
high quality audit
 Conclusion
Our results indicate that mandatory rotation results in higher audit quality.

First, an engagement partner is more likely to require an audit adjustment when the
partner is scheduled for mandatory rotation at the end of the year.

Second, researcher find that a newly appointed engagement partner is more likely to
require an adjustment during the partner’s first year of tenure following mandatory
rotation. This is consistent with newly appointed engagement partners bringing a
fresh perspective to the audit that can identify more financial reporting problems.

Our findings have significant implications for public policy because many countries
rely on mandatory audit partner rotation rather than mandatory audit firm rotation
to ensure high-quality audits