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An Analysis of Mandatory Rotation and Auditor Independence
Chiawen Liu, National Taiwan University
Taychang Wang, National Taiwan University
ABSTRACT. This paper uses an infinite-period model to examine the effects of mandatory rotation on auditor independence. The results indicate that under mandatory rotation, it is more likely for an auditor to compromise his independence in the early periods of the tenure and switch to report independently in the later periods. Only when the rotation cycle is limited to one period can mandatory rotation be a panacea to eliminate an auditor's tendency to compromise his independence. Once the rotation cycle exceeds one period, the impacts of mandatory rotation hinge on the micro- and macro-perspectives of the audit environment. If there is a lack of a well-developed disciplinary mechanism, if the discount rate is high, or if the economy is in its downturn, then it is more likely that mandatory rotation will improve auditor independence. Otherwise, the requirement could have an adverse effect on auditor independence.
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