Working Paper: Determinants and Career Consequences of Early Audit Partner Rotations

Paper Authors: Brandon Gipper, Luzi Hail, and Christian Leuz

Abstract: We analyze a sample of 3,973 within-audit firm partner rotations for Big 6 issuer clients from 2008 to 2014, a period when audit partners were not publicly known, and find that partner rotations occurring early—before the end of the maximum five-year term—are associated with major audit quality issues such as financial restatements or PCAOB inspection findings. This link to audit quality is more pronounced for larger clients, when the local office in charge of the audit is less constrained, and for newer, less experienced partners, but it is not present for early rotations explained by common life events such as retirements, promotions, or temporary leaves. Incoming partners have a track record of high audit quality, are more senior, and have more time for the new engagement. Early rotations have career consequences for exiting partners. They are subsequently assigned to fewer, less risky SEC issuer clients, manage fewer audit hours, and receive lower partner ratings. Our results suggest that early partner rotations serve an important role for quality control within audit firms. 

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