Audit Firm Tenure and Audit Quality: Evidence from U.S. Firms

68 Pages Posted: 16 Jan 2013

See all articles by Li Zheng Brooks

Li Zheng Brooks

Washington State University - Department of Accounting

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2013

Abstract

We propose that audit quality is likely to increase in the earlier years due to a Learning Effect and in later years it decreases due to a Bonding Effect. Adopting a quadratic model, we find that the average turning point is between 12 to 16 years for a large sample of U.S. firms. With an average tenure of 9 years in our sample, these findings imply that mandatory auditor firm rotation may not be necessary. Further, we find that the turning point varies by auditor - it is longer for non-Big N auditors, non-specialist auditors, and auditors with high client importance, and the deterioration of audit quality exists in low litigation industries only, consistent with the Bonding Effect explanation. Moreover, we find the turning point gets longer in the post-SOX period. Our results have implications for the current debate on mandatory audit firm rotation.

Keywords: audit firm tenure, mandatory auditor rotation, audit quality, independence, turning point

JEL Classification: M41, G31

Suggested Citation

Brooks, Li Zheng and Cheng, C.S. Agnes and Reichelt, Kenneth John, Audit Firm Tenure and Audit Quality: Evidence from U.S. Firms (January 15, 2013). CAAA Annual Conference 2013. Available at SSRN: https://ssrn.com/abstract=2201350 or http://dx.doi.org/10.2139/ssrn.2201350

Li Zheng Brooks (Contact Author)

Washington State University - Department of Accounting ( email )

Pullman, WA 99164
United States
509-595-0124 (Phone)

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting ( email )

2821 Business Education Complex
Baton Rouge, LA 70803
United States
225-578-6233 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
738
Abstract Views
2,749
rank
5,726
PlumX Metrics