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Mandatory auditor rotation and retention: impact on market share

Christie L. Comunale (School of Professional Accountancy, Long Island University, Brookville, New York, USA)
Thomas R. Sexton (College of Business, Stony Brook University, Stony Brook, New York, USA)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 1 April 2005




To explore the effects of mandatory auditor rotation and retention on the long‐term market shares of the accounting firms that audit the members of the Standard and Poor's (S&P) 500.


A Markov model is constructed that depicts the movements of S&P 500 firms in the period 1995 to 1999 among Big 5 accounting firms. Auditor rotation and retention are reflected in the transition probabilities. The impacts of mandatory auditor rotation and retention policies are evaluated by examining the state probabilities after two, five, and nine years.


The paper finds that mandatory auditor rotation will have substantial effects on long‐term market shares, whereas mandatory auditor retention will have very small effects. It shows that a firm's ability to attract new clients, as opposed to retaining current clients, will be the primary factor in determining the firm's long‐term market share under mandatory auditor rotation.

Research limitations/implications

The paper assumes that S&P 500 firms will continue their reliance on Big 5 firms and that the estimated transition probabilities will remain stable over time.

Practical implications

Excessive market share concentration resulting from such policies should not be a concern of regulators. The paper conjectures that, under mandatory rotation, accounting firms will reallocate resources to attract new clients rather than retain existing clients. This may result in lower audit quality.


Interestingly, over the past 25 years, several bodies have considered mandatory auditor rotation and retention. Surprisingly, the authors have found no studies of the effects of mandatory auditor rotation and retention on audit market share.



Comunale, C.L. and Sexton, T.R. (2005), "Mandatory auditor rotation and retention: impact on market share", Managerial Auditing Journal, Vol. 20 No. 3, pp. 235-248.



Emerald Group Publishing Limited

Copyright © 2005, Emerald Group Publishing Limited

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