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The Revolving Door's Hidden Mechanism: Intra-institutional Circulation of Audit Knowledge and the Limits of Independence Regulation

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  • Kusachi, Takahiro

Abstract

Independence regulations governing the auditor-to-client revolving door — exemplified by SOX Section 206 — target only the auditor's side of the engagement. They do not address the transformation in information structure that occurs when a former auditor assumes a financial leadership role at an audit client. This paper argues that such appointments trigger a fundamental shift in the game-theoretic structure of the audit relationship. Drawing on Aumann's (1976) common knowledge framework, Spence's (1973) signaling theory, and Crawford and Sobel's (1982) cheap talk model, we theorize this shift as a transition from an authority-deference mode to a joint constraint confirmation mode of audit negotiation. We conceptualize the underlying mechanism as the intra-institutional circulation of audit knowledge: the systematic transfer of audit expertise through personnel mobility within the organizational field of auditing (DiMaggio & Powell, 1983). The appointment partially resolves and locally reverses information asymmetry (P1); this structural change shifts the mode of audit negotiation (P2); and the shift carries ambivalent consequences — improving efficiency while generating a risk of independence becoming nominal (P3). These propositions offer a theoretical mechanism for the mixed empirical findings of prior revolving door research, and identify a structural blind spot in current independence regulation. This is a conceptual paper grounded in reflexive practitioner analysis (Schön, 1983). The author is a former PricewaterhouseCoopers CPA with experience as a financial executive at audit clients — a vantage point unavailable to external researchers. The propositions are offered as a structured invitation to subsequent empirical research.

Suggested Citation

  • Kusachi, Takahiro, 2026. "The Revolving Door's Hidden Mechanism: Intra-institutional Circulation of Audit Knowledge and the Limits of Independence Regulation," SocArXiv 986kq_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:986kq_v1
    DOI: 10.31219/osf.io/986kq_v1
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    References listed on IDEAS

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