Mandatory Audit Partner Rotation, Audit Quality, and Market Perception: Evidence from Taiwan

We examine the effectiveness of mandatory audit partner rotation in promoting audit quality and perceptions of audit quality using audit data from Taiwan, where a five-year audit partner rotation became de facto mandatory in 2004. We identify a sample of companies in 2004 whose audit partners were subject to mandatory rotation and compare this mandatory rotation sample with three benchmark samples: (a) companies in 2004 whose audit partners were not subject to mandatory rotation, (b) companies in the mandatory rotation sample one year earlier (2003) under old audit partners, and (c) companies in years before 2003 whose audit partners were voluntarily rotated. Using both absolute and signed abnormal accruals as proxies for audit quality, we find no evidence that mandatory audit partner rotation enhances audit quality. In addition, we use the earnings response coefficient as a proxy for investor perceptions of audit quality and find no consistent evidence that mandatory audit partner rotation enhances perceived audit quality. Taken together, our findings are inconsistent with the belief that mandatory audit partner rotation enhances audit quality or perceptions of audit quality.