Auditor rotation, key audit matter disclosures, and financial reporting quality

Auditor rotation is believed to affect financial reporting quality partly because of the fresh views brought by new auditors. However, fresh views are generally unobservable and are often presumed. This study examines fresh views as evidenced by changes in key audit matters (KAMs) following auditor rotation. Using data from Taiwan, we find that different KAM disclosures are more likely to be observed when there is a change in audit partner(s) than when there is none. The identification of different KAMs provides evidence of the fresh perspective of the new auditors. We also examine the association between financial reporting quality and auditor rotation based on whether there is a change in KAM disclosures. We find that auditor rotation is not significantly associated with accruals quality when there is no change in KAMs after the rotation. Auditor rotation tends to affect accruals quality only when different KAMs are provided by the succeeding audit partners. This finding suggests that auditor rotation influences financial reporting quality under circumstances when auditors change their assessments of significant risk, as this can affect the audit plan and process, and accordingly affect the audit results.