Auditor Tenure and Audit Quality: The Role of the Demand for Unique Client Specific Knowledge
University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy
City University of Hong Kong (CityUHK) - Department of Accountancy
Ferdinand A. Gul
Monash University Sunway Campus
April 16, 2010
Using a sample of US firms from 1988 to 2000, we find a strong positive (weak or no) association between auditor tenure and earnings quality in client firms whose demand for unique client-specific knowledge is higher (lower). These results are consistent with the idea that learning the unique client-specific knowledge is best accomplished by long tenure. Firms requiring higher unique client-specific knowledge are identified in two ways: those with operating characteristics that diverge significantly from industry norms and those with high audit complexity as measured by volatility and audit fees. Our findings are robust to alternative specifications of earnings quality.
Number of Pages in PDF File: 50
Keywords: Mandatory Audit Firm Rotation, Auditor Tenure, Client-Specific Knowledge, Earnings Quality
JEL Classification: M42
Date posted: April 16, 2010
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