Auditor tenure and auditor change: does mandatory auditor rotation improve audit quality?

We test the effects of auditor tenure and auditor change on audit quality in a unique mandatory audit firm rotation environment, where the rotation rule has been effective for more than 20 years. We first study the effect of audit tenure on audit quality. Our results show that audit quality—measured in terms of earnings management—tends to improve rather than worsen over time. We also examine the effects of voluntary auditor change vs. those resulting from mandatory auditor changes. Our results suggest that, in a mandatory rotation setting, a voluntary change of the auditor tends to improve audit quality while a mandatory change tends to hamper audit quality. Overall, our findings do not support claims that there are beneficial effects of mandatory audit rotation on audit quality.