FINDINGS ON THE EFFECTS OF AUDIT FIRM ROTATION ON THE AUDIT PROCESS UNDER VARYING STRENGTHS OF CORPORATE GOVERNANCE

While performing an annual audit of a client's financial statements, an audit firm's staff identified what seems to be a material misstatement. Two discussions with the client have led to an impasse in that the client refuses to record what the auditor regards as a necessary adjustment. Our experimental study analyzes whether the likelihood of public accountants modifying their audit report for this departure from generally accepted accounting principles is affected by whether audit firm rotation is about to occur (no rotation v. rotation) under each of the two levels of corporate governance (weak v. strong). Our subjects include 105 CPA firm employees and partners who have an average experience level slightly less than 14 years. Results suggest that auditors in the rotation condition are more likely to modify their audit report as contrasted to those in a situation in which a continuing relationship is expected.