Abstract

http://ssrn.com/abstract=1982317
 
 

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Does Long Tenure Erode Auditor Independence?


Ling Chu


Wilfrid Laurier University

Bryan K. Church


Georgia Institute of Technology - Accounting Area

Ping Zhang


University of Toronto - Rotman School of Management

January 10, 2012

CAAA Annual Conference 2012

Abstract:     
Regulators have shown a renewed interest in considering the merits of mandatory auditor rotation. A fundamental concern is that long tenure may undermine auditor independence. We conduct a study to investigate the effects of long tenure on companies’ allowance for bad debts (ABD). We focus on ABD, as opposed to total accruals, because it allows us to hone in on the effect of auditor tenure on a specific accrual. By examining ABD, we are able to conduct a more direct and powerful test and avoid some of the measurement error and noise associated with total accruals (e.g., discretionary or abnormal). We find evidence of a negative association between auditor tenure and estimated ABD. The finding holds across a series of robustness tests. Further analyses suggest that long tenure (around 15 years) is associated with downward bias in estimated ABD. With long tenure, the auditor endorses an estimate of ABD that is too aggressive. This result is consistent with the argument that long tenure leads to compromised independence. Our findings suggest that a term limit of 10 years, which has been suggested elsewhere (e.g., PCAOB 2010; Chasan 2011), is sufficient to preserve auditor independence.

Number of Pages in PDF File: 33

Keywords: auditor tenure, auditor independence, accounting reporting

JEL Classification: M41

working papers series





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Date posted: January 10, 2012  

Suggested Citation

Chu, Ling and Church, Bryan K. and Zhang, Ping, Does Long Tenure Erode Auditor Independence? (January 10, 2012). CAAA Annual Conference 2012. Available at SSRN: http://ssrn.com/abstract=1982317 or http://dx.doi.org/10.2139/ssrn.1982317

Contact Information

Ling Chu
Wilfrid Laurier University ( email )
75 University Avenue West
Waterloo, Ontario N2L 3C5
Canada
Bryan K. Church
Georgia Institute of Technology - Accounting Area ( email )
755 Ferst Drive
Atlanta, GA 30332-0250
United States
404-894-3907 (Phone)
404-894-6030 (Fax)
Ping Zhang (Contact Author)
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
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