How do auditor rotations affect key audit matters? Archival evidence from South African audits

The expansion of the auditor's reporting duties with the introduction of critical or key audit matters (KAMs) has reignited interest in the determinants and consequences of the rules and regulations aimed at improving audit's functionality and quality. This paper expands on a growing body of work which investigates possible determinants of the KAMs being included in audit reports. It provides an original perspective on KAM identification and reporting in three ways. Firstly, the paper deals specifically with audit partner and firm rotations as possible KAM determinants. Secondly, hand-collected details are analysed to test for changes in the absolute number of KAMs as well as for KAMs added to or removed from audit reports to provide a more refined measure of how KAM disclosures are varying. Finally, data are gathered from South Africa to complement the empirical work which, to date, has largely focused on the U.S. and U.K. Our findings reveal a duality of stability and variability in how the requirement to report KAMs is being operationalised. A change in audit partner is not associated with changes in reported KAMs but changing audit firms appears to have a significant impact on the KAMs added to or removed from an audit report. The provisions of ISA 701 promote consistency in how KAMs are identified and disclosed by individual partners. However, ISA 701 cannot define and control every aspect of KAM determination. As a result, there is a degree of agency at the firm-level which allows for differences in how audit firms choose to implement the standard's provisions. Our study makes an important contribution by providing evidence of the complex interaction between standardisation of audit practice and sources of performative variability and may lend weight to the regulatory arguments in favour of mandatory firm rotation.