Does Increased Audit Partner Tenure Reduce Audit Quality?
1 Pages Posted: 21 Nov 2008
Date Written: November 19, 2008
Abstract
The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed "with fresh and skeptical eyes." Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms.
Keywords: Discretionary accruals, auditor tenure, earnings management
JEL Classification: M49, M41, M43
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Relation between Auditors' Fees for Non-Audit Services and Earnings Management
By Richard M. Frankel, Marilyn F. Johnson, ...
-
Do Non-Audit Service Fees Impair Auditor Independence? Evidence from Going-Concern Audit Opinions
By Mark L. Defond, Kannan Raghunandan, ...
-
By Rick Antle, Paul A. Griffin, ...
-
Evidence on the Joint Determination of Audit and Non-Audit Services
-
The Joint Determination of Audit Fees, Non-Audit Fees, And Abnormal Accruals
By Rick Antle, Elizabeth A. Gordon, ...
-
The Jointness of Audit Fees and Demand for MAS: A Self-Selection Analysis
-
Engagement Planning, Bid Pricing, and Client Response in the Market for Initial Attest Engagements
By Karla M. Zehms and Jean C. Bedard
-
Disclosure of Fees Paid to Auditors and the Market Valuation of Earnings Surprises
By Jere R. Francis and Bin Ke
-
Non-Audit Services and Earnings Conservatism: Is Auditor Independence Impaired?
By Caitlin M. S. Ruddock, Sarah J. Taylor, ...