Determinants of Audit Quality

Audits conducted by audit firms are one of the main instruments by which financial markets attain assurance over financial information. The focus of this study is to determine to what extent the audit partner individually and the audit firm as an institution are responsible for the assurance provided by the audit firm. Using a sample consisting of 857 German companies and 5.931 firm-year observations this paper studies the effect a rotation of audit firm and audit partner has on audit quality. The findings of this study suggest that the audit firm (and the institutional knowledge it has) is the main determinant of audit quality. More controversial, they also suggest that a rotation of audit partner is sufficient to preserve auditor independence and thus to maintain audit quality over time.