Audit Rotation Policies and Their Effect on Audit Quality and Independence

Abstract

This research introduces a novel methodological framework for evaluating audit
rotation policies by integrating computational network analysis with behavioral economics principles, moving beyond traditional archival accounting studies. We develop
a multi-agent simulation model that captures the complex social and professional networks within audit ecosystems, examining how different rotation mandates influence
not only observable audit outcomes but also the latent dynamics of auditor-client relationships, cognitive biases, and professional interdependence. Our approach uniquely
conceptualizes audit quality as an emergent property of network interactions rather
than merely a function of individual auditor competence or firm policies. The simulation incorporates parameters derived from behavioral experiments with practicing
auditors, including trust decay functions, reciprocity biases, and social learning mechanisms. We test three distinct rotation regimes: mandatory firm rotation, mandatory
engagement partner rotation, and a novel hybrid adaptive rotation system that triggers rotations based on network centrality metrics rather than fixed time intervals.
Results from 10,000 simulation runs reveal counterintuitive findings: while mandatory firm rotation improves independence metrics by 18%, it simultaneously reduces
industry-specific expertise diffusion by 32%, creating a net negative effect on audit
quality for complex industries. The proposed adaptive rotation system demonstrates
superior performance, increasing both independence indicators (by 22%) and quality
metrics (by 15%) through strategic disruption of overly embedded relationships while
preserving valuable knowledge networks. This research contributes a fundamentally
new analytical paradigm for regulatory policy evaluation that accounts for the complex adaptive nature of audit ecosystems, offering evidence-based insights for designing
rotation policies that optimize the independence-quality tradeoff.