Departing and Incoming Auditor Incentives, and Auditor-Client Misalignment under Mandatory Auditor Rotation: Evidence from Korea
By Gil Bae, Sanjay Kallapur, Joon Hwa Rho
Citation
Bae, Gil., Kallapur, Sanjay., Rho, Joon Hwa. (2014). Departing and Incoming Auditor Incentives, and Auditor-Client Misalignment under Mandatory Auditor Rotation: Evidence from Korea .
Copyright
2014
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Abstract
In this paper we use data from Korea which has had mandatory rotation since 2006 to provide evidence on specific factors that could affect audit quality under mandatory rotation. We find no evidence supporting the “Brillo pad effect” (the argument that departing auditors have incentives to clean up the balance sheet) or the “new broom effect” (the argument that new auditors can find problems that long-standing auditors tend to overlook). On the contrary, departing auditors spend fewer hours just before rotation, consistent with a lack of incentives to maintain quality given the impending rotation. Compared to clients in other mandatory rotations, the clients rotating away from industry specialist auditors have higher audit hours and higher absolute discretionary accruals post-rotation, suggesting adverse effects from breaking such auditor-client pairings. Finally we find that Big 4 auditors’ market share continues to increase after mandatory rotation is imposed. Our findings therefore fail to support mandatory rotation.

Sanjay Kallapur is a Professor of Accounting at the Indian School of Business (ISB). He joined ISB in 2005 from the Krannert School of Management, Purdue University, where he was a tenured Associate Professor.

Professor Kallapur conducts research on financial and managerial accounting, auditing, corporate governance, and risk management. He has published in each of the top three accounting journals, and his papers have been cited over 4,000 times (Google Scholar) and in regulatory policy documents in India and the UK. The American Accounting Association recently published his monograph on scientific inference in accounting research, beyond the use of p-values.

He is the founding Editor-in-Chief of Accounting Theory and Practice, a research journal focusing on India, published by Elsevier. He has been an editor of The Accounting Review from 2008 to 2011, the first person from outside North America to be appointed to that position.

Professor Kallapur is a member of National Financial Reporting Authority (NFRA), the regulatory body overseeing the accounting and auditing of listed companies in India. He is an independent director on the Board of IDBI Bank, where he serves on the risk management and audit committees. He previously served on the Board of the Life Insurance Corporation of India.

Professor Kallapur has held positions as Associate Dean and Deputy Dean for almost a decade at ISB. He started the PhD-equivalent Fellow Programme in Management at ISB and has placed his students in faculty positions at the London School of Economics, IESEG Paris, Aalto University, University of Queensland, University of Western Australia, and IIM Udaipur.

Professor Kallapur has a PhD in Business Economics from Harvard Business School, and B.Com. and M.M.S. degrees from Mumbai University. He is professionally qualified as a Fellow Member of the Institute of Cost Accountants of India (FCMA).

Sanjay Kallapur
Sanjay Kallapur