Auditor Tenure and the Timeliness of Misstatement Discovery

Posted: 4 Sep 2015 Last revised: 5 Jul 2017

Zvi Singer

HEC Montreal

Jing Zhang

University of Alabama in Huntsville

Date Written: June 4, 2017

Abstract

Using the timeliness of misstatement discovery as a proxy for audit quality, we examine the association between audit firm tenure and audit quality in a setting that alleviates the endogeneity problem endemic to this line of research. We find that longer audit firm tenure leads to less timely discovery and correction of misstatements, which is consistent with a negative effect of long auditor tenure on audit quality. In addition, using the non-voluntary auditor change following the demise of Arthur Andersen in 2002 as a natural experiment, we show that the misstatements of its former clients were discovered faster than those of comparable companies that retained their auditors throughout the misstatement. This finding speaks to the benefit of a fresh look by a new auditor. An extended analysis shows that longer auditor tenure also leads to misstatements of greater magnitudes, and that the Sarbanes-Oxley Act has mitigated, but not eliminated, the negative effect of long auditor tenure. Lastly, we show that the negative association between auditor tenure and timely discovery of misstatements is mainly present in the first ten years of an audit engagement. Our study has implications for regulators who continue to express concern regarding lengthy auditor-client engagement.

Keywords: audit firm tenure; timeliness of misstatement discovery; misstatement duration; audit quality; non-voluntary auditor change

JEL Classification: K22, K23, L51, M41, M42, M48

Suggested Citation

Singer, Zvi and Zhang, Jing, Auditor Tenure and the Timeliness of Misstatement Discovery (June 4, 2017). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2654998 or http://dx.doi.org/10.2139/ssrn.2654998

Zvi Singer (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
514-340-1847 (Phone)

Jing Zhang

University of Alabama in Huntsville ( email )

Huntsville, AL 35899
United States
2568246617 (Phone)

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