Reducing the Potential Negative Effects of Mandatory Partner Rotation

Brian Daugherty, PhD, CPA, and Denise Dickins, PhD, CPA, CIA, and Julia Higgs, PhD, CPA

The Sarbanes-Oxley Act of 2002 (SOX) shortened the maximum allowable period an audit partner may serve on a U.S. publicly traded company's audit engagement from seven years to five years and lengthened the minimal allowable cooling-off period from two years to five years. Since adoption of the revisions, concerns have been raised about the potential erosion of client-specific and industry knowledge resulting from mandatory audit partner rotation and the resulting potential negative impact on audit quality and financial reporting quality (U.S. Department of the Treasury, Advisory Committee on the Auditing Profession [ACAP], February 4, 2008 meeting). These concerns are potentially due to audit engagement partners requiring two to three years to fully familiarize themselves with client-specific issues, processes, and controls on newly assigned audit engagements (Brian Daugherty, Denise Dickins, and Julia Higgs, “Mandatory Audit Partner Rotation: Partners' Perceptions of Impacts on Quality of Life and Audit Quality,” working paper presented at the American Accounting Association's annual meeting, August 2010).