The Effect of Earlier Contract Date for Auditor Change on Audit Quality

ABSTRACT This study investigates the effect of an earlier contract for auditor change (ECAC) on audit quality. In November 2018, the Korean government mandated that client firms must complete audit engagement contracts before the date of the audit report. This requirement informed incumbent auditors about the final year of their engagement prior to completing audit procedures. Our hypothesis suggests that this increased awareness enhances the independence of incumbent auditors, resulting in improved audit quality. The findings support the hypothesis and reveal that audit quality with incumbent auditors in the year preceding the auditor change is higher following the implementation of ECAC. ECAC is identified as a cost‐effective approach, as it can be readily implemented by advancing the notice date for auditor changes. These findings offer valuable insights to other countries seeking to enhance their audit quality while minimising costs.