Short Horizon for Audit Partner and Audit Quality: Evidence From a Dual-Rotation Regime

Our study examines how a short audit partner horizon affects audit quality. A short audit partner horizon originates from the joint requirement of mandatory audit firm rotation and mandatory audit partner rotation. We study a unique setting in Italy where a 9-year mandatory firm rotation term and a 7-year mandatory partner rotation term are jointly imposed. The outcome is at least two partner horizons, where one partner horizon is shorter than the other. We predict that the partner with the shorter horizon will likely invest less effort in acquiring client knowledge. Namely, the expected payoffs are fewer, tacit knowledge is not sufficiently transferred from the previous partner, and monitoring by the successor partner is insufficient. We find that clients whose auditors have a shorter partner horizon are associated with lower audit quality. Our findings provide insights for academics, audit firms, and regulators in evaluating auditor rotation strategies in their countries, especially in the European Union, where member states have mandatory audit partner and audit firm rotation. JEL codes: M42 and M48