Do different cooling-off modes affect audit quality? A study based on the audit rotation system in China

Huanmin Yan, Hangyu Jiang, Haodong Zhao, Ziling Geng and Fang Hu

Asia-Pacific Journal of Accounting & Economics, 2025, vol. 32, issue 3, 551-569

Abstract: Using a sample from China’s regime, we find that, longitudinally, whether auditors treat former clients favorably after rotation-back depends on the cooling-off modes. Relative to the year before rotation, audit quality after rotation-back is higher if the auditors use the ‘substantive’ cooling-off mode, whereas the audit quality decreases if the auditors use the ‘non-substantive’ cooling-off mode. Horizontally, audit quality in the initial year after auditor rotation-back increases with increased length of the cooling-off period. These effects vary based on the audit firm quality control system. Furthermore, our analysis reveals that auditors exhibit a greater propensity to employ ‘non-substantive’ cooling-off strategies in instances where the client – auditor relationship is more intimate, clients have fewer business risks, and audit firms/auditors contend with constrained audit resources. We further find some evidence of client – auditor collusion under ‘non-substantive’ cooling-off modes. Our findings carry implications for application of mandatory auditor rotation requirements.

Date: 2025
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DOI: 10.1080/16081625.2024.2309382

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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