Mandatory Audit Rotation Policies and Auditor Independence Implications

Abstract

This research investigates the complex and often paradoxical implications of
mandatory audit rotation (MAR) policies on auditor independence, moving beyond
the conventional economic and regulatory frameworks that have dominated the discourse. While existing literature primarily debates MAR’s efficacy in preventing auditor familiarity and economic dependence on clients, this study introduces a novel,
multi-dimensional analytical model that integrates behavioral psychology, institutional theory, and network analysis to deconstruct the independence construct. We
argue that independence is not a binary state but a dynamic continuum influenced
by cognitive biases, relational embeddedness, and the institutional logics of audit
firms. Our methodology employs a longitudinal, mixed-methods design, analyzing
archival data from jurisdictions with and without MAR over a 15-year period, combined with in-depth interviews and cognitive mapping exercises with audit partners.
The findings reveal a counterintuitive ’compliance paradox’: in rigid MAR regimes,
formal independence is enhanced, but substantive, judgment-based independence
can be compromised due to compressed learning curves and intensified commercial pressures during the initial engagement years. Conversely, the study identifies
a ’relational residue’ effect, where auditor-client knowledge networks persist beyond formal rotation, challenging the assumption of a clean slate. Furthermore, we
demonstrate that the effectiveness of MAR is heavily contingent on the underlying
institutional environment, including litigation regimes and corporate governance
quality. The paper concludes by proposing a tiered, risk-based rotation framework
as a superior alternative to one-size-fits-all mandates, emphasizing the calibration
of rotation triggers to specific client risk factors rather than arbitrary time periods.
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Published: 2022-06-28
This research contributes original theoretical insights by reconceptualizing auditor
independence as a systemic property and offers pragmatic, evidence-based policy
alternatives