The auditor‐to‐client revolving door: A structured literature review

• Published date: 01 November 2018
• DOI: http://doi.org/10.1111/ijau.12132
• Date: 01 November 2018

ORIGINAL ARTICLE

The auditor‐to‐client revolving door: A structured literature

review

Amr Kotb

1

|Hussein Halabi

2

|Hany Elbardan

3,4

1

Zayed University, Academic City, Dubai, UAE

2

Swansea University, Swansea, UK

3

Bournemouth University, Business School,

Bournemouth, UK

4

Alexandria University, Faculty of Commerce,

Egypt

Correspondence

Amr Kotb, Zayed University, Academic City,

P.O. Box 19282, Dubai, UAE.

Email: kotb.amr@gmail.com

This study analyzes the underexplored research area of audit revolving door (ARD).

The analytical framework categorized the reviewed articles by author and article

information, citation, research theme, motivational event, jurisdiction, nature of

research, regional focus, organizational focus, research method, data analysis, litera-

ture focus, and findings. Our analysis highlights that no particular aspect can be held

true or generalized about the ARD phenomenon. The ARD literature is USA domi-

nated, organizationally based, and focused on post‐departure issues, employing a

quantitative approach with obvious lack of perceptions of stakeholders. We call for

more qualitative research that critiques pre‐and post‐ARD, addressing the “how”

and “why”questions, soliciting perceptions of various stakeholders. To frame direc-

tions for future research, we refer to three areas: threats, benefits, and safeguards

of ARD. Our findings are relevant to research students reviewing the auditing litera-

ture to find their own research and to academic auditing researchers looking for

appropriate research outlets.

KEYWORDS

audit firm alumni/affiliation, Audit revolving door, employment of ex‐auditor, former auditor,

structured literature review

1|INTRODUCTION

Independence and competence are the two primary qualities that

auditors are expected to possess, which were characterized by

Barnes and Huan (1993, p. 215) as “mutually inclusive features of

an audit”and, in the language of Lee and Stone (1995, p. 1171),

as “the congenial twins of auditing.”The lack of one, if not both, is

frequently drawing media attention, specifically if corporate failure

is the case. While auditor competence is always assumed to exist

or, as criticized by Humphrey, Moizer, and Turley (2007), to be

given, auditor independence has been the subject of a growing

volume of criticism and several reforms, due to the engagement of

auditors in audit‐quality‐threatening behaviors (Clikeman, 1998;

Dart, 2011).

Of the various threatening behaviors to actual and apparent

auditor independence, and therefore to audit quality, perhaps the

one that is much less explored is the revolving door phenomenon

between external auditors and their audit clients (henceforth “audit

revolving door”or “ARD”). ARD occurs when an audit client hires

from the current external audit firm personnel, usually audit man-

agers/partners, for corporate financial reporting (or management/

oversight) positions such as chief financial officer (CFO), chief

accounting officer, controller, director, or any equivalent position

(e.g., Abbott, Brown, & Higgs, 2016; Ahmad, 2015; Wilson, 2017a,

2017b).

1

The ARD phenomenon is likely to happen in either a direct

move or indirect move from audit firms to audit clients. While the

direct ARD occurs when a member of the audit engagement team

is directly hired by a currently being/recently been audited client,

the indirect ARD happens when the hired auditor has not previously

been involved in auditing the hiring company's financial statements

(i.e., the audit client) as well as their having worked elsewhere in

the corporate sector before moving to the hiring company (Finley,

Kim, Lamoreaux, & Lennox, 2018). The direct/indirect ARD phenom-

enon is neither a new nor a simple theoretical issue. Rather, it has

been acknowledged as happening for many years and is still

ongoing.

Received: 16 October 2017 Revised: 9 April 2018 Accepted: 14 June 2018

DOI: 10.1111/ijau.12132

464 © 2018 John Wiley & Sons Ltd Int J Audit. 2018;22:464–485.wileyonlinelibrary.com/journal/ijau

As a threat to actual and apparent auditor independence,the ARD

phenomenon was originally brought to the fore by the United States

Congress in the Metcalf Report on “The Accounting Establishment,”

which specifically examined the issue of auditor independence (US

Senate Subcommittee on Reports, 1976, p. 21). In this report, the

auditor–management relationship was cited among situations that

were believed to be the cause of a general creditability problem,

resulting in a lack of independence and a lack of dedication to public

protection by accounting firms. Following that, Imhoff Jr. (1978, p.

870) conducted perhaps the earliest academic research investigating

and documenting the ARD phenomenon, pointing out that it was

“not uncommon for certified public accountants (CPAs) to be offered

senior management positions with client firms.”However, following

the high‐profile corporate failures in the early 21st century, this type

of auditor–client relationship has been brought into the sharp focus

of the media and regulatory bodies worldwide. For example, Dart

and Chandler (2013) remarked that the client employment of external

auditors to senior corporate positions was one feature common to

most companies involved in accounting scandals, such as Enron and

Waste Management and Global Crossing in the USA, HIH Insurance

in Australia, and Independent Insurance in the UK (Geiger, North, &

O'Connell, 2005; Guy & Zeff, 2002). Indeed, this confirms what was

noted by an American Institute of Certified Public Accountants

(AICPA) representative (Wright & Booker, 2005, p. 26), as the pros-

pect of obtaining a corporate position is a key attraction point in

entering the accounting profession, and thus any restriction on ARD

would limit the career opportunities of accountants, making the pro-

fession less attractive.

While restrictions on ARD were debated and proposed in the past,

the first time this practice was specifically forbidden was following the

high‐profile financial scandals in the early 21st century (Geiger et al.,

2005). Professional bodies issued/revised their ethical standards, and

regulators placed controls (primarily a cooling‐off period) to mitigate

risks, possibly resulting from ARD practice. AICPA (1991) issued an

ethics ruling that imposed constraints on auditors to not be involved

in the audit when offered a job by a client. This ethics ruling mainly

focused on situations where an auditor was being approached by a cli-

ent for employment purposes during the audit engagement. Likewise,

in the UK, the Auditing Practices Board (APB) issued the Ethical Stan-

dards for Auditors in 2004, addressing ARD practice as a threat to auditor

independence and objectivity and dealing with consequences for the

audit firm of auditing personnel career moves to audit clients. These

ethical standards were then revised in 2008 and 2010 (see APB,

2010). Furthermore, there was no legislation that prohibited an auditor

from taking a position with a client until the high‐profile corporate fail-

ures in the early 2000s. In the USA, in 2002, the Sarbanes–Oxley (SOX)

Act introduced a new requirement of a 1‐year cooling‐off period before

an auditor can accept a position with an audit client (Abbott et al., 2016;

US House of Representatives, 2002). Countries are different in the

enforcement of the cooling‐off period and its length, if it is required.

While a 2‐year cooling‐off period was introduced in the UK (Basioudis,

2007), Australia (Martinov‐Bennie, Cohen, & Simnett, 2011), Malaysia

(Ahmad, 2015), and Germany (Schlaich & Ziegler, 2014), a 1‐year

cooling‐off period was announced in Singapore (Koh & Mahathevan,

1993) and Hong Kong (Law, 2010).

Despite the ethical standards and regulations that prohibit auditors

from accepting positions with audit clients up to a certain amount of

time (i.e., the cooling‐off period) after leaving their former audit firms,

there is a more‐recent evidence that ARD continues to happen. For

example, after the collapse of Colonial Bank in 2009, PwC settled a

$5.5bn fraud detection lawsuit because of its failure in detecting and

stopping a conspiracy between the executives of Colonial Bank and

Taylor, Bean & Whitaker (McLannahan, 2016). For the 6 years before

its collapse, Colonial BancGroup, the Colonial Bank's parent, was given

a clean audit opinion by PwC. The collapse has been attributed, how-

ever, to the lack of auditor independence resulting from ARD. In 2005

and 2006, PwC continued to audit Colonial, even though one of its

senior managers engaged in those audits was appointed to a top finan-

cial oversight position at Colonial. Lynn Turner, a former chief accoun-

tant for the US Securities said: “PwC should not have cited an

‘emergency’exemption to standards banning accounting firms from

auditing a company for a year after it makes such a hire”(McLannahan,

2016). In a similar case, in the UK, the Financial Reporting Council (FRC)

fined KPMG £162,500, as one of its partners, Mel Egglenton, became a

nonexecutive director of car dealer Pendragon while at the same time

KPMG audited Pendragon accounts for 2010 and 2011 (Agnew,

2015). The appointment of Mel Egglenton was after only 9 months of

his stepping down as a partner of KPMG and less than 6 months after

being engaged in providing consultation to Pendragon (Osborne,

2013). The FRC considered that KPMG procedures were not sufficient

to decide whether the appointment of Mel Egglenton would have

required the resignation of KPMG from auditing Pendragon.

ARD became an area of interest within the field of audit research

when Imhoff Jr. (1978) published his paper “Employment effects on

auditor independence”in the Accounting Review. Since then, studies

have mainly investigated the positive and negative consequences of

ARD (e.g., Abbott et al., 2016; Basioudis, 2007; Dart & Chandler,

2013; Firth, 1981; Geiger et al., 2005; Iyer, Bamber, & Barefield,

2000; Koh & Mahathevan, 1993; Parlin & Bartlett, 1994). However,

academic literature on this issue is very limited and most importantly

is inconclusive, resulting in many research questions being unad-

dressed. For example, while Ahmad (2015) concludes that the appear-

ance of auditor independence is negatively affected by the auditor–

client employment issue, in agreement with a number of prior studies

(e.g., Firth, 1981; Imhoff Jr., 1978; Kilcommins, 1997; Koh &

Mahathevan, 1993; Law, 2010; Wright & Booker, 2005), Sori and

Mohamad (2008) and Geiger et al. (2005) generally do not support

concerns of significantly impaired auditor independence in these hir-

ing situations. This inconclusive evidence applies to similar issues of

ARD impact in relation to audit quality, effectiveness of the cooling‐

off period, reporting quality, and possible benefits resulting from

ARD. This perhaps results in one conclusion: the ARD phenomenon

remains an area ripe for further research. With this in mind, we

believed that a literature review of the existing ARD research would

be a crucial starting step in this regard because it would set the status

quo of ARD from the perspective of past research, portray the focus

of existing major ARD research themes, and identify the gaps for

future research directions. Accordingly, this paper aims to review

and critique the existing ARD research, thus suggesting ways forward

for future ARD research.

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