An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jane M. Hamilton
La Trobe University and The Capital Markets CRC

Caitlin Ruddock
University of New South Wales

Donald Stokes
University of Technology Sydney and Capital Markets Crc Ltd

Stephen Taylor
University of New South Wales and Capital Markets CRC Ltd

Abstract: We provide evidence of an association between audit partner rotation and the quality of earnings. We show that audit partner changes are associated with lower signed unexpected accruals and that for Big-5 clients this relation is driven by smaller positive unexpected accruals. This result is consistent with more conservative reporting following a rotation of audit partner. This interpretation is further supported by evidence suggesting a significant increase in the asymmetrically timely recognition of economic losses when firms rotate audit partners. Our tests show that these effects occur predominantly among Big-5 clients, and in the latter part of our sample period, when partner rotation was a professional requirement. We therefore conclude that audit partner rotation is associated with incrementally greater conservatism in financial reporting, but only where the ability of client firms to resist partner rotation is reduced by mandatory partner rotation requirements.

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