An Empirical Study On The Relationship Between Auditor Rotation And Audit Quality

In 2004,China government ruled that the CPAs who are engaged in securities and futures should rotate periodically and the period is 5 years,but as a matter of fact some companies havenot complied with the policy.In 2009,the code of professional ethics of CPA repeated this matter and enlarged the rotation extent.What is the effect of the policy and did the policy could enhance audit quality required us to do some study.This paper is divided in two major parts including theoretical analysis and empirical analysis to confer the rotation of auditor. In the theoretical part, the article describes the development and mechanism of the rotation by the theoretical analysis,and introduces Principal-Agent Theory and Rent Seeking Theory and the significance of the rotation. The contradictory and significance of the rotation is explained from three sections: the comparison of cost and benefits, the influence on audit quality and supervision and control of the government during the effectiveness analysis. We use the auditor change of listed companies as the research object and collect the mandatory rotation of auditors'date from 2005 to 2009 in Shanghai and Shenzhen Stock Exchange as the research sample. Empirical research on the relationship between auditor rotation and audit quality is done by comparing the different situations of rotation. We compare the forward and backward annual targets of the mandatory rotation to further analysis. This article investigates the differences between the changed and unchanged CPA, the before and after of the CPA measuring audit quality by the discretionary accruals, using whether change audit and reach the 5-year audit tenure as explanation variables.The results showed that replacement of auditors can significantly reduce the earnings quality. But it doesn't significantly improving audit quality compared with voluntary audit rotation and 5-year without rotation sample. The effects of the mandatory rotation has a lag of two years, which is caused by the new customs and the lack of professional skills. Finally, we give some advices on policy changing intended to provide reference for policy makers. Wish this research could be beneficial to the capital market development and to promote the academic and practice further study.