Auditor rotation and perceived competence and independence: the effect of fees and industry specialization

Regulators and practitioners argue the relative merits of firm and partner rotation, while researchers report mixed results on the consequences of rotation. This study uses an experiment to examine the effect of an upcoming rotation on perceptions of auditor competence and independence and finds that participants appear to be indifferent to whether rotation is at the firm or partner level; they only react to concurrent changes in audit fees and the industry specialization status of the new auditor. Specifically, participants assess auditor competence and independence (specifically attention to detail, effort, and skeptical attitude) to be higher when fees increase rather than decrease significantly at the time of a rotation, and they assess auditor competence to be higher when rotation is to an industry specialist rather than a nonindustry specialist. These findings hold regardless of whether rotation is at the firm or partner level.