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Close auditor-client relationships: adverse effects and the potential mitigating role of partner rotation

Qiliang Liu (School of Management, Huazhong University of Science and Technology, Wuhan, China)
Lei Zhao (School of Management, Huazhong University of Science and Technology, Wuhan, China and Department of Accountancy, City University of Hong Kong, Kowloon Tong, Hong Kong)
Li Tian (Shenzhen Stock Exchange, Shenzhen, China)
Jian Xie (School of International Education, Guangxi University of Finance and Economics, Nanning, China)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 17 August 2021

Issue publication date: 25 August 2021

332

Abstract

Purpose

This paper aims to investigate whether close auditor-client relationships affect audit quality over the tenure of the audit partner and the potential role of partner rotation in mitigating this effect.

Design/methodology/approach

Using the Chinese mandatory audit partner rotation setting, the authors identify the existence of a close auditor-client relationship if the audit partner tenure with a client is larger than the audit firm tenure with that client. The sample period (1998–2009) is divided into voluntary and mandatory rotation periods when examining the effects of audit partner tenure on audit quality for the normal and close auditor-client relationship subsamples, respectively. The authors also conduct a propensity score matching analysis to address a selection issue.

Findings

The paper finds that under the voluntary partner rotation regime, audit quality decreases with audit partner tenure for the subsample with close auditor-client relationships, whereas this effect is not shown in the normal relationship subsample. However, audit quality no longer declines with audit partner tenure under the mandatory partner rotation regime.

Originality/value

This is the first study that directly examines the effect of audit partner tenure on audit quality associated with close auditor-client relationships under the voluntary and mandatory partner rotation regimes.

Keywords

Acknowledgements

This work was supported by the [National Natural Science Foundation of China] under Grant [No. 71172206].

Citation

Liu, Q., Zhao, L., Tian, L. and Xie, J. (2021), "Close auditor-client relationships: adverse effects and the potential mitigating role of partner rotation", Managerial Auditing Journal, Vol. 36 No. 6, pp. 889-919. https://doi.org/10.1108/MAJ-07-2020-2770

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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