Abstract

This paper investigates whether the length of auditor－firm tenure affects audit quality. There is an opposing viewpoint for the relationship between audit tenure and audit quality. One viewpoint argues that financial reporting quality increases with longer audit tenure. Auditors do not have adequate client－specific knowledge during the early years of engagement and would not be able to detect material errors and misstatements. They have to pay high litigation costs if audit failure occurs and they usually devote professional effort to maintain their reputations. The other viewpoint argues that long relationship between an auditor and a client results in a decline in audit quality. Auditors would be more likely to agree with managers on important reporting decisions as the length of audit engagement increases. The lengthy audit tenure may erode an auditor’s independence for its clients, which in turn impairs audit quality. This paper uses discretionary accruals as a proxy for the audit quality and measure it several different ways to increase internal reliability of the research findings about the relationship between audit tenure and audit quality. The results of this paper are as follows. First, the length of audit tenure has negative relations with discretionary accruals. This means that audit quality increases as the auditor－client tenure lengthens. The result is the same for each sample firms when the total sample is divided into two groups, one group having positive discretionary accruals and the other group having negative discretionary accruals. Second, when we split sample firms into the firms audited by Big 4 and the firms audited by Non－Big 4, the negative relationship is found only for the Big 4 sample firms. This means that audit quality improves only for the firms audited by Big 4 with longer audit tenure. Third, we cannot find any relationship between audit tenure and audit quality if we use absolute value of discretionary accruals for the measure of audit quality instead of raw one. It indicates that audit tenure does not affect the magnitude of earnings management regardless of positive or negative directions. This paper is expected to give contributions to extant research by providing additional evidence about the relationship between audit tenure and audit quality. This research also can give useful information to regulatory agencies to enact mandatory rotation of auditors.

Keywords

• auditor tenure
• earnings management
• discretionary accruals
• audit quality
• auditor type
• mandatory auditor rotation

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