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The Effect of Audit Rotation on Auditor Choice and Audit Quality in the Government Audit Market
Jacqueline L Reck,
University of South Florida
Suzanne Lowensohn, Colorado State University
Randal J Elder, Syracuse University
ABSTRACT: Mandatory auditor rotation continues to be debated due to recent corporate scandals. Proponents of rotation believe that lengthy auditor tenure inhibits auditor independence adversely affecting audit quality, while opponents cite higher audit costs and increased risk of audit failures in transition years. Because rotation is a decision about auditor selection, rotation may indirectly affect audit quality through auditor choice. We examine the effect of auditor rotation on auditor selection and the subsequent level of audit quality for Florida governments. Florida provides a unique opportunity to examine the effects of mandatory audit rotation on auditor choice and audit quality since some municipalities require periodic rotation. Furthermore, governmental audit report quality, a measure of audit quality, is available. We find that entities with audit rotation policies select more specialized auditors, and specialist auditors are significantly related to greater audit quality.
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