Effect of auditor rotation violation on audit opinions and audit fees: Evidence from China

Xuehua Zhang, Huanmin Yan, Fang Hu, Hongjian Wang and Xiaoning Li

Research in International Business and Finance, 2022, vol. 62, issue C

Abstract: In the setting of the Chinese auditing regime, we identify a sample of “rotation-violation” auditors who continue to serve clients after the mandated rotation period has expired, and find that the occurrence of auditor rotation violation is driven more by supply-side factors than by demand-side factors or market institutional factors. By controlling the endogeneity problem using a treatment effects model, we find that rotation-violation auditors significantly issue more favorable opinions and are paid higher fees. These results support our proposed auditor–client collusion argument that rotation-violation auditors issue favorable opinions to clients in return for fee premiums. Further, we find that the collusion effects of auditor rotation violation are decreased by the existence of government control, audit firm location, and the regional market development in the Chinese environment. Our findings draw regulators’ attention to the real effects and enforcement of audit partner rotation.

Keywords: Rotation-violation auditors; Audit opinion; Audit fees; Convenience effect; Collusion effect (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001039

DOI: 10.1016/j.ribaf.2022.101715

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