Is Audit Quality Associated with Auditor Tenure, Industry Expertise, and Fees? Evidence from PCAOB Opinions

48 Pages Posted: 20 Sep 2007

See all articles by Katherine Gunny

Katherine Gunny

University of Colorado at Denver

Gopal V. Krishnan

Bentley University

Tracey Chunqi Zhang

Singapore Management University - School of Accountancy

Date Written: August 31, 2007

Abstract

This study examines the link between deficiencies documented in the inspection reports of the PCAOB and several auditor attributes - tenure, industry expertise, and fees paid to the auditors. We examine two types of deficiencies or negative opinions: an audit deficiency, such as failure to perform and document sufficient substantive procedures and a serious deficiency such as failure to detect a departure from GAAP that could (if material) result in a restatement of the financial statements. We find that auditor tenure and industry expertise mitigate both types of deficiencies for non-Big 4 auditors. It appears that auditor's industry expertise is more important than auditor tenure for mitigating deficiencies. We also find that auditor's city-level expertise has incremental power for audit quality over nation-level expertise in mitigating both types of deficiencies. Abnormal audit fees and total fees are associated with audit deficiencies and serious deficiencies. Further, the interaction of abnormal audit fees and tenure increases the likelihood of serious deficiencies. The findings have implications for audit firms, clients, investors, regulators, and others.

Keywords: Audit quality, Auditor tenure, Audit fees, Industry expertise, PCAOB

JEL Classification: M41, M49, G18, G34, G38, L84

Suggested Citation

Gunny, Katherine and Krishnan, Gopal and Zhang, Tracey Chunqi, Is Audit Quality Associated with Auditor Tenure, Industry Expertise, and Fees? Evidence from PCAOB Opinions (August 31, 2007). Available at SSRN: https://ssrn.com/abstract=1015089 or http://dx.doi.org/10.2139/ssrn.1015089

Katherine Gunny (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Gopal Krishnan

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Tracey Chunqi Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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