When Does Audit Quality Start to Decline in Firm Audit Tenure? - An International Analysis
Li Zheng Brooks
Washington State University - Department of Accounting
C.S. Agnes Cheng
Hong Kong Polytechnic University - School of Accounting and Finance; Louisiana State University
Joseph Atkins Johnston
City University of Hong Kong (CityUHK)
Kenneth John Reichelt
Louisiana State University, Baton Rouge - Department of Accounting
September 25, 2011
This paper investigates the decline in audit quality during an audit firm’s tenure across countries with varying degrees of legal liability. We propose that audit quality can increase through a learning effect in early years but in later years it is likely to decrease due to a bonding effect. Using a quadratic model, we estimate the year when audit quality, measured by earnings quality, starts to decline during an audit firm’s tenure. We propose that the bonding effect should be weaker in countries with stricter legal liability regimes, which implies that the year that audit quality begins to decline should be later in countries with stricter legal liability regimes. We find that it takes 14 to 16 years for countries with stronger legal liability regimes while it only takes 4 to 10 years for countries with weaker legal liability regimes for audit quality to decline. Our results are strong regardless of whether we measure legal liability from the perspective of legal origin (common or code law) or litigation risk. Our findings have implications across the world for the current debate on the mandatory requirement of audit firm rotation across the world.
Number of Pages in PDF File: 45working papers series
Date posted: September 26, 2011
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.391 seconds