daugherty et al - 2012 - an examination of partner perceptions of partner rotation - direct and indirect consequences to audit quality

Higgs SUMMARY: Using structured interviews and surveys of practicing audit partners, this study examines their perceptions with regard to mandatory partner rotation and cooling-off perio

Vol 31, No 1 DOI: 10.2308/ajpt-10193 February 2012

pp 97–114

An Examination of Partner Perceptions of Partner Rotation: Direct and Indirect

Consequences to Audit Quality

Brian E Daugherty, Denise Dickins, Richard C Hatfield, and Julia L Higgs SUMMARY: Using structured interviews and surveys of practicing audit partners, this study examines their perceptions with regard to mandatory partner rotation and cooling-off periods, and how recently enacted, more stringent rules, may negatively impact auditors’ quality of life to the detriment of audit quality Results suggest rotation, in general, increases partners’ workloads and the likelihood of relocation Additionally, results suggest that in response to accelerated rotation (and an extended cooling-off period), partners would rather learn a new industry than relocate Importantly, partners perceive audit quality suffers from retraining, but not from relocating Thus these results suggest an indirect, negative impact, and unintended consequence, of accelerated rotation/extended cooling-off periods on audit quality

Keywords: Sarbanes-Oxley; audit partner rotation; auditor independence; audit quality;

quality of life

Data Availability: The survey instrument is available upon request Individual audit

partner responses are confidential

INTRODUCTION

T his study examines the perceptions of practicing audit partners with regard to mandatory

audit partner rotation and cooling-off periods, focusing on how more stringent rules may lead to unintended consequences (i.e., negative impact on audit quality) through their effect

on partners’ quality of life Many countries require some form of audit partner rotation and cooling

Brian E Daugherty is an Assistant Professor at the University of Wisconsin–Milwaukee, Denise Dickins is an Assistant Professor at East Carolina University, Richard C Hatfield is a Professor at The University of Alabama, and Julia L Higgs is an Associate Professor at Florida Atlantic University

The authors thank Larry Abbott, Patricia Arnold, Joe Brazel, Karen Hooks, Leslie Kren, Linda McDaniel, Dan Neely, Scott Showalter, Ehsan Soofi, Wayne Tervo, and an anonymous reviewer from the Midyear Auditing Meeting for their helpful observations and suggestions We also thank workshop participants at The University of Tennessee, North Carolina State University, the University of Central Florida, The University of Montana, Southern Illinois University– Carbondale, and the University of Wisconsin–Milwaukee We are grateful to Logan Wehking and Tim Yang for valuable research assistance, and are especially appreciative of the anonymous firms and practicing audit partners participating in this research.

Editor’s Note: Accepted by Ken Trotman.

Submitted: May 2011 Accepted: October 2011 Published Online: January 2012

off For example, the European Union currently requires partner rotation every seven years and a cooling-off period of two years, the U.K has a five-year-on, five-year-off policy, and Australia has

a five-year-on, two-year-off policy Coincident with the enactment of the Sarbanes-Oxley Act of

2002 (SOX), the U.S shifted from a seven-year rotation with a two-year cooling-off period, to a five-year rotation and five-year cooling-off period (U.S House of Representatives 2002).1 This regulatory change provides a unique setting to investigate the perceptions of partners who have worked under both standards.2Mandatory rotation of audit engagement partners results in a

‘‘fresh look’’ at client risks and engagement issues, and increases the auditor’s independence, in part

at the expense of lost client-specific knowledge (U.S House of Representatives 2002) While these direct effects on audit quality have been discussed in prior literature, in this study we specifically consider how rotation (and changes in rotation rules) influence partners’ perceived quality of life (indirect effects), and how partners may make decisions to optimize their quality of life that may in turn reduce audit quality

In 2008, the U.S Department of Treasury’s Advisory Committee on the Auditing Profession (ACAP) heard testimony on partner rotation, including arguments that changes in rotation rules have negatively impacted partners’ quality of life and audit quality (ACAP 2008a) Specifically, the testimony documents partners’ difficulties with reassignments caused by increased rotation and the profession’s growing concern of being able to attract and retain high-quality partners under the current rotation/cooling-off system Testimony also addressed the concern that the revised rules would have a negative effect on technical and sector experience, leading to reduced audit quality

To investigate these issues, we first conducted in-depth semi-structured interviews with seven practicing audit partners (most of whom were also managing partners) in various geographic locations, to better understand the current environment with regard to mandatory rotation and how the revised rules are affecting practicing partners Based on these interviews, we developed a model

of the effects of mandatory rotation on audit quality and created a field survey completed by 370 audit partners to test the model A key aspect of this inquiry (and a key concern raised by all of the interviewed partners) is how partners’ quality of life may be impacted by regulations, and how partners manage their career and personal life while operating under the revised regulations It is these quality-of-life decisions that potentially result in unintended negative impacts on audit quality when the partner is subject to the new rotation requirements

Our study contributes to the literature by focusing on mandatory rotation’s influence on audit partners’ perceived quality of life and audit quality based on partners’ perceptions of rotation rules

in effect in both the pre- and post-SOX periods While anecdotal information from audit partners (e.g., ACAP testimony) suggests the potential audit quality effects considered here, this is the first study to develop this relationship explicitly and provide evidence consistent with this expectation Our research also allows for a unique comparison of seven-year versus five-year rotation (and two year versus five-year cooling off ) that may be informative as the consequences of mandatory rotation continue to be debated, both in the U.S and in the international community, and as the auditing profession continues toward international convergence of auditing standards

Results of the interviews and field surveys suggest, in general, that partners perceive some direct effects of rotation on audit quality Consistent with prior research, rotation is viewed as improving independence resulting in a positive impact on audit quality However, the reduced client-specific knowledge is perceived to negatively impact audit quality Beyond these direct

1

The revised rotation and cooling-off mandates now extend to the concurring partner—now known as the quality review partner ( PCAOB 2009 )—unlike the previous rotation requirements.

2 The new requirements became effective for fiscal years beginning on or after May 6, 2003 ( SEC 2004 ) For calendar-year companies, the new requirements require initial partner rotations no earlier than calendar 2004 audits, and no later than calendar 2009 audits Our participating partners average 11 years as an audit partner.

expectations, our results suggest the SOX-imposed accelerated rotation and extended cooling-off mandates may have an indirect effect on audit quality as well Partners believe that audit quality is maintained by relocating to maintain industry expertise, but perceive audit quality suffers when partners opt to gain new industry experience in order to avoid relocation However, due to quality-of-life issues, partners report being more likely to opt to retrain rather than relocate That is, the preferred response to rotation (if necessary) is to choose an option that they perceive to have a negative effect on audit quality in order to preserve their quality of life

These inferences are made more evident by the fact that, in general, partners believe rotation increases the likelihood of relocation, yet they believe that accelerated rotation (five years) will not increase the likelihood they will relocate, though it will increase the likelihood they will opt to gain new industry experience Consequently, the SOX-accelerated rotation appears to increase the likelihood that partners will specialize in multiple industries, at the expense of industry depth and to the detriment of audit quality as reported by our practicing audit partners Further, partners report a two- to three-year new-client familiarization period before they are fully effective on new engagements, increasing the amount of time audit engagements suffer from ‘‘start-up’’ efficacy concerns In contrast, while partners participating in our research perceive rotation generally improves auditor independence, they do not perceive accelerated rotation (and an extended cooling-off period) further enhances independence

The remainder of the paper is organized as follows The next section expands on mandatory rotation issues brought before ACAP, discusses the results of our semi-structured interviews with partners, and develops a model of direct and indirect effects of mandatory rotation and related hypotheses based on these discussions The third section discusses the study’s field survey methodology Results are presented in the fourth section, and the last section provides conclusions and suggestions for future research

MANDATORY ROTATION ISSUES BROUGHT BEFORE ACAP

Many countries have mandatory audit engagement partner and/or audit firm rotation requirements The primary rationale for rotation is that it results in a ‘‘fresh look’’ at client and engagement issues and increases auditor independence, in part at the expense of lost client-specific experience (U.S House of Representatives 2002) Accordingly, it is not surprising that the extant research is split on whether audit quality is improved by rotation For example, audit partner rotation was found to improve auditor conservatism (Hamilton et al 2005) and audit quality (Cameran et al 2009) in regimes mandating audit partner rotation On the other hand,Geiger and Raghunandan (2002), Myers et al (2003),andJohnson et al (2002) all found audit and financial reporting quality and audit firm tenure to be positively related; andJackson et al (2008)found the likelihood of an auditor issuing a going-concern opinion increases with audit firm tenure Although changes to regulations, such as mandatory rotation, may appear to address specific concerns (e.g., auditor independence), consideration must also be given to the potential for negative and unintended consequences as behaviors change in response For example, literature dealing with the unintended consequences of new regulations suggests careful consideration must be given to

‘‘second order’’ effects resulting from altered behavior of decision makers, which may be contrary

to the original intent of regulators (e.g.,Kolev et al 2008; Bru¨ggemann et al 2010; Lambert et al

2011) Of particular interest in this study is how quality-of-life considerations may influence practicing audit partners’ behavior as they adjust to accelerated rotation and lengthened cooling-off periods

In an effort to examine the U.S audit profession post-SOX, ACAP was formed A number of stakeholders provided testimony and commentary to ACAP regarding partners’ quality-of-life and audit quality issues surrounding the SOX rotation mandates For example, Brian Jennings, CFO of

Energy Transfer Partners, testified that, given the rise of dual careers, coupled with family requirements and location preferences, partner development and retention will be affected and will potentially harm sector specialization.3 Further, the Center for Audit Quality (CAQ 2008, 5) discussed partners’ quality-of-life issues, suggesting ‘‘more frequent rotation of partners poses significant logistical and human capital challenges for firms, and will likely result in at least one more relocation in the typical partner’s career.’’ Wayne Kolins, BDO Seidman’s national director of assurance, testified that the revised partner rotation requirements may impair the ability of firms to assign the most qualified audit partners to specific audits, noting the rules seem to imply ‘‘each accounting firm has an unlimited and interchangeable supply of suitably qualified partners with the same level of skills and industry expertise in every office’’ (Kolins 2008,16) Additionally, smaller firms may be affected more, given the potential for a limited number of partners with sufficient industry expertise.4

Semi-Structured Partner Interviews

In an effort to better understand how issues such as those raised by ACAP and the CAQ may influence the effect that rotation has on audit quality, we conducted semi-structured interviews with seven practicing audit partners from seven different firms, six of whom were office managing partners (OMPs) from various geographic locations and from differing office sizes The other partner was a leading industry specialist, selected to assist in development of the field survey statements relevant to industry expertise Data from these interviews were used to develop a model (Figure 1) that demonstrates: (1) how rotation is generally perceived to influence audit quality through its direct impact on client-specific knowledge and auditor independence, and (2) how indirect effects caused by quality-of-life issues brought on by more stringent rotation rules may also affect audit quality Consistent with the approach employed by Hirst and Koonce (1996) and

Beasley et al (2009), the use of semi-structured interviews allowed us to delve further into the partners’ responses to develop the study’s model A standard script guided the interviews Each interview lasted in excess of an hour, was attended by at least one of the authors, and notes were taken We explained that the purpose of the research was to explore perceptions of mandatory partner rotation—including the SOX-mandated changes—on quality-of-life and audit quality issues Partners were interviewed separately and could elaborate on any issue they chose

In general, interviewed partners felt the prior rotation rules (seven years on, two years off ) achieved the benefits of a fresh look at engagement issues such as audit scopes and risk assessments They also agreed that improved independence is important However, when discussing the SOX-imposed rotation rules, they brought up two issues concerning possible negative impacts on audit quality The first issue concerns the time required to get ‘‘up to speed’’ on

a new audit engagement Accelerating rotation from seven to five years on any audit client may lead

to only two years of highest audit quality, as it takes approximately two years for a new partner to get fully up to speed, and partners potentially lose some efficacy in the year before they rotate off an audit engagement as they spend time ‘auditioning’ with audit committees of potential successor audit clients This concern was presented in several ways, but consistently came up in discussions with this high-level group of partners

3

See testimony of Brian Jennings on February 4, 2008 ( ACAP 2008b, 22–25) and the June 3, 2008 ACAP meeting minutes ( ACAP 2008c, 278).

4 The CAQ also noted that concurring partners generally bring deep industry expertise to an audit and play an important role in the overall quality of public company audits ( CAQ 2008 ) As SOX rotation requirements now extend to concurring partners, there is an increased likelihood that their substantial industry expertise may be diminished by the new rotation requirements We use the ACAP findings in the formulation of the study’s model.

Second, interviewed partners voiced their ‘‘primary concern’’ to be how accelerating rotation (and extending cooling off ) affects the quality of life of their partners Interviewed partners believe relocations would necessarily increase (e.g., one partner stated that the average career would have at least one additional relocation due to the SOX revisions) They also believe partners likely manage their careers to minimize the potentially negative personal impact of relocation This can be accomplished by having a greater breadth of industry specialization—though potentially at the expense of industry depth

Several anecdotal stories were given describing how the current generation of newer partners are resistant to relocation and are emphasizing quality of life over compensation One key factor is

‘‘spouse equality,’’ where both spouses are equally educated, having similar earning power, such that moving is not as economically necessary as it once was Also, parents of younger children face the possibility of changing their children’s’ school up to three times under the revised rotation rules (compared to once or twice under the prior rules) For example, one spouse refused to move, requiring the rotating partner to commute long distances Our interviewed partners consistently assessed this as a sub-optimal response, leading to poorer client service and lower audit quality

In an attempt to avoid relocation, interviewed partners provided examples of engagement partners training in new industries which could slow their advancement opportunities and reduce audit quality They also cited examples where partners avoided relocation by taking on less prestigious clients, again emphasizing quality of life over career progression Finally, a key concern

of these interviewed partners is that highly rated partners, and highly rated senior managers on the partner track, may forgo a career in public accounting to avoid these issues, stating negative perceptions of the revised rotation rules appear to grow more pronounced as the auditor’s level in the firm rises Most of these partners stated they believe these issues to be exacerbated in smaller firms and smaller offices of large firms, with few or even a single large prestigious client(s) Model of Direct and Indirect Effects of Rotation, and Development of Hypotheses

Based on the in-depth partner interviews, the ACAP testimony, and prior literature, we developed a model (Figure 1) that includes both the direct effects of mandatory rotation on audit quality due to shorter audit partner tenure5and increased independence, and the potential indirect effects on audit quality intimated by the discussion of partners’ quality-of-life concerns The model displays the secondary linkage between shorter rotation and longer cooling-off periods and audit quality Prior literature has suggested direct effects on audit quality due to increased independence,

a ‘‘fresh look,’’ and reduced client-specific knowledge Our model suggests that, beyond these direct links, rotation/cooling-off mandates affect a partner’s quality of life, and that these quality-of-life issues will lead partners to respond to rotation requirements by learning new industries rather than relocating Finally, the model shows that such a choice ultimately has a negative effect on audit quality The study’s hypotheses are based on the key links in this model

Direct Effects

Shareholders engage independent auditors to reduce the likelihood that managers will engage

in opportunistic behavior (e.g., perquisite consumption and shirking) at their expense (Jensen and Meckling 1976) DeAngelo (1981) theorizes the quality of the independent auditor’s work is dependent upon the auditor’s ability to both detect and report identified financial statement errors

5 Financial reporting quality and audit firm tenure are positively related ( Myers et al 2003 ), and audit quality is lowest in the first three years of a firm’s tenure, and highest in years four through eight ( Johnson et al 2002 ) Accounting and Auditing Enforcement Releases related to fraud are positively associated with shorter firm tenures ( Carcello and Nagy 2004a ).

Prior research has confirmed a positive association between auditor expertise and audit quality For example, client-specific experience, a proxy for expertise, enhances auditors’ ability to respond to fraud indicators (Brazel et al 2010); and industry expertise has been found to be positively associated with financial reporting quality (Carcello and Nagy 2004b; Krishnan 2003, 2005) While behavior modeling research (DeAngelo 1981) theorizes that auditors have incentives to collude with managers and not report identified financial statement misstatements in an effort to retain the audit, research in support of this proposition is not convincing Summarizing much of prior research investigating the relationship between non-audit fees and audit quality,Moehrle and Reynolds-Moehrle (2006, 2007) suggest the evidence is inconclusive Using the audit partner’s engagement tenure as the proxy for independence, Simnett and Carey (2006) found a negative relationship between auditor independence and the likelihood of issuing a going-concern opinion; and Hatfield et al.’s (2011) results suggest a positive association between audit firm and audit partner changes and the magnitude of proposed audit adjustments.6

When audit engagement partners rotate, absent effective knowledge-transfer strategies, client-specific explicit and tacit knowledge may be lost, to the detriment of audit quality Accelerating audit engagement partner rotation and extending cooling-off periods may accentuate this issue; hence, we expect:

H1: Audit partners perceive auditor rotation (and accelerated rotation and longer cooling-off periods) to have a negative impact on auditor client-specific knowledge

FIGURE 1 Model of Direct and Indirect Effects of Mandatory Rotation on Audit Quality

6

Dickins and Skantz (2010) propose these differences may be dependent upon who de facto monitors the auditor, managers or the independent audit committee In the post-SOX period, when independent audit committees are explicitly responsible for monitoring independent auditors, decreases in incumbency quasi-rents (e.g., non-audit fees) act to reduce auditor incentives to maintain their independence and report identified errors Similarly, decreases in technological advances gained by repeat engagement experience are predicted to reduce auditor incentives to remain independent.

Consistent withDeAngelo’s (1981)proposition, mandatory partner rotation reduces the bond between audit partners and their clients That is, longer associations between audit partners and their clients can create personal relationships that make it more difficult for the auditor to act independent

of the preferences of the client Accordingly, we hypothesize:

H2: Audit partners perceive auditor rotation (and accelerated rotation and longer cooling-off periods) to have a positive impact on auditors’ independence

Indirect Effects

Like all individuals, audit partners strive to achieve personal satisfaction, which includes maintaining a satisfactory work/life balance; minimizing conflicts with family members’ goals, wishes, and geographic preferences; and living in a desirable location Quality-of-life issues, including job-related stress, burnout, job satisfaction, and turnover intentions have been recognized

as important in the public accounting profession Research has considered how such quality-of-life issues influence professional commitment and stress (e.g.,Hall et al 2005; Bernardi 2003), and how quality-of-life issues are exacerbated when a working spouse and/or children are involved (e.g., Jackson et al 1985; Parasuraman et al 1989) Our structured interviews, as well as the testimony heard by ACAP, suggest increasing the frequency of rotation for audit partners will negatively impact audit partners’ quality of life (link A in Figure 1); hence, we hypothesize: H3: Audit partners perceive auditor rotation (and accelerated rotation and longer cooling-off periods) to have a negative impact on their quality of life

As previously discussed, the semi-structured interviews provide anecdotal evidence that partners may put quality-of-life issues above career advancement opportunities, particularly in the presence of a working spouse and/or children Relocating can lead to many of the stressors discussed above, and commuting may not be a viable alternative given Jackson et al.’s (1985)

finding that commuting contributes to dissatisfaction with job/family congruence Partners could avoid some of these issues by retraining rather than relocating (link B in Figure 1) Further, research tracking social and generational trends suggests Generation X, individuals born between 1965 to 1976—who have or would be reaching the partner level now—are more family oriented than previous generations (NAS 2006) and are therefore likely to put quality-of-life issues ahead of career considerations; hence, we hypothesize:

H4: In response to shorter rotation (and longer cooling-off ) periods, partners perceive retraining has a better outcome on their quality of life than relocating

Some of the interviewed partners indicated audit quality may suffer beyond the direct effects of shorter engagement partner tenure and extended cooling off, in that the preferred alternatives to relocation may have a negative effect on audit quality For example, retraining in new industries can lead to several issues, including the possibility that an auditor’s ability to detect errors increases with expertise and industry knowledge, as confirmed by prior research For example, client-specific experience enhances auditors’ ability to respond to fraud indicators (Brazel et al 2010); and industry expertise has been found to be positively associated with financial reporting quality (Solomon et al 1999; Krishnan 2003, 2005).7Reflective of link C in Figure 1, and as further detailed in Figure 2, we hypothesize:

7 In support of the notion that auditors’ industry expertise is important to clients, Blouin et al (2007) documented that a number of Andersen’s former audit clients did not engage a new audit team following the firm’s demise, but rather followed their former audit engagement team to the successor auditing firm, especially when Andersen was viewed to be the industry leader in the local market.

H5: In terms of audit quality, partners perceive relocating is a better outcome than retraining.

METHODOLOGY The field survey was distributed to 370 practicing partners from 14 firms, representing approximately 40 distinct practice office locations of varying size Partners solicited to complete the field survey were identified through contacts known to the authors in a variety of geographic locations For larger firms, this typically involved having a contact partner distribute the survey to all audit partners in a specific practice location Further, one of the eight largest firms and two of the top 25 firms consented to a nationwide distribution of the survey to all U.S audit partners Of the surveys distributed, 170 (46 percent response rate) were returned, comprising 37 Big 4 partners (21.8 percent of the sample), 86 midsize firm partners (50.6 percent of the sample), and 47 partners from other firms (27.6 percent of the sample).8 All respondents had public company audit experience with firms subject to mandatory rotation

RESULTS Demographics of Field Survey Participants

Table 1 provides demographic data of the audit partners participating in the field survey Eighty percent of surveyed partners are male and 90 percent are married; they average 47 years of age and have been an audit partner for 11 years.9Partners reported expertise in an average of 2.6 industries and served as lead (concurring) partner on an average of 1.7 (1.8) public audits during the past year Partners report an average of 2.14 children (averaging 1.41 under the age of 18).10

The only significant demographic differences by firm size (not tabulated) relate to the number

of expert industries (p , 0.05), number of public companies served as lead (concurring) partner in the prior year (p , 0.001 (p , 0.01)), and the number of assurance partners (p , 0.001) in the local practice Consistent with ACAP’s view that the burden of rotation was on smaller firms and practice offices (excluding exempt firms), differences noted are generally driven by the Big 4 and/or midsize firms as compared to the other partners Collectively, our partner participants are in offices

FIGURE 2 Learning a New Industry versus Relocating

8

These response rates compare favorably to those of other survey-based auditing research (e.g., Bamber and Iyer’s [2007] 23 percent, DeZoort and Salterio’s [2001] 20 percent, and Brazel et al.’s [2010] 48.8 percent response rates).

9

Thus, most of our surveyed audit partners practiced in both the pre- and post-SOX rotation environments.

10

Inclusion of these variables in the analyses does not change the results of any of the hypothesized effects.

TABLE 1 Demographic Data of Surveyed Audit Partners Panel A: Age, Expertise, and Experience

Big 4a

n¼ 37

Midsizeb

n¼ 86

Otherc

n¼ 47

Total

n¼ 170 Mean

(s.d.)

Mean (s.d.)

Mean (s.d.)

Mean (s.d.)

Times relocated due to mandatory rotation (n¼

166)

# of lead partner public-company audits last year

(n¼ 166)

# of concurring partner public-company audits

last year (n¼ 166)

Panel B: Other Demographics

Mean # (s.d.) of children by age (0.73) (0.78) (0.71) (1.18) (1.15)

Maintained second residence for

client service (n¼ 167)

Big 4a Midsizeb Otherc Total Overall

a

Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers.

b

BDO Seidman, Crowe Horwath, Grant Thornton, and McGladrey & Pullen.

c All other firms, primarily top 25 firms not categorized as Big 4 or midsize.

averaging around 11 audit partners, with one-third reporting five or fewer partners in their local practice office, and two-thirds having eight or fewer partners (not tabulated), providing a favorable mix of small and midsize practice office locations to investigate the hypotheses The number of audit partners in the local offices of the Big 4, midsize, and other partner respondents average (range) 21 (3–120), 8 (1–45), and 8 (2–30), respectively

Direct Effects of Rotation on Audit Quality

We first consider partners’ perceptions about the intended benefit of mandatory audit engagement partner rotation (independence) and the generally agreed upon cost (lost client-specific knowledge by the auditors) These relationships are represented by the outside links in the model (Figure 1) Participants were asked the extent of their agreement on a seven-point scale (1— Strongly Disagree, 4—Neutral, 7—Strongly Agree) to statements dealing with rotation It should be noted that p-values are calculated by comparing means to the scale midpoint, which is a meaningful midpoint separating general agreement from disagreement with the survey statement

Consistent with H1 (Table 2, Panel A), partners agreed with the statement that such knowledge

is lost due to rotation (mean¼ 5.61; p , 0.01) Further, they perceive that longer auditor tenure increases audit quality (mean¼ 4.26; p , 0.05) A surveyed partner discussed the importance of client relationship building, a notion that is frequently considered as negative in terms of its potential impact on auditor independence and audit quality, noting: ‘‘It takes several years normally

to establish relationships with key executives of an audit client These relationships aid in the partners’ understanding of their client’s businesses which enables them to better identify risk and,

as a result, adjust the audit approach to address those risks Therefore, audit quality can be negatively impacted when a key member of the engagement team, who has gained special knowledge of a client, is removed from the team.’’

Consistent with H2 (Table 2, Panel A), partners generally agree with the statements that

‘‘partner rotation improves independence in’’ both fact and appearance (mean¼ 4.44 and 5.70, respectively; both p-values , 0.001).11Similarly they agree rotation reduces inappropriate client attachment (mean¼ 4.69; p , 0.001) Contrary to perceptions regarding the positive impacts of rotation (in general) on auditor independence, our surveyed partners perceive little to no value resulting from accelerating rotation or extending cooling-off periods (Table 2, Panel B) Participants disagree that accelerated rotation (and extended cooling off ) improve independence

infact (means of 2.87 [2.80], with 65.1 [66.3] percent expressing some level of disagreement, and only 13.8 [12.0] percent agreeing, all p-values , 0.001).12Responding partners also perceive no benefits in terms of extended cooling offs’ impact on independence inappearance (mean of 3.97, p 0.10); however, they do believe independence in appearance is enhanced as a result of accelerated rotation (mean of 4.28, 54.5 percent agreeing and 26.4 percent disagreeing, p , 0.05,

no differences based on firm size)

Effect of Rotation on Partners’ Quality of Life

The first link (Link A) in our model demonstrating the indirect effect of rotation on audit quality links partner rotation and partner quality of life H3 predicts rotation, in general, negatively impacts partners’ quality of life Survey results are consistent with this expectation (see Table 3, Panel A)

11

Large office partners felt more strongly that partner rotation improves independence in appearance, compared to smaller offices (means of 6.00 and 5.57, respectively, p , 0.05).

12

Larger office partners reported less agreement that the rule changes improved independence in fact, compared to smaller offices (means of 2.50 and 3.10, respectively, p , 0.01).