The Effects of Auditor Tenure on Fraud and Its Detection

51 Pages Posted: 20 Mar 2017 Last revised: 3 Dec 2018

See all articles by Evelyn Patterson

Evelyn Patterson

Indiana University-Kelley School of Business

Reed Smith

Kelley School of Business

Samuel L. Tiras

Indiana University - Kelley School of Business

Date Written: November 30, 2018

Abstract

We examine the strategic effects of auditor tenure on the auditor’s testing strategy and the manager’s inclination to commit fraud. Most empirical studies conclude that longer tenure improves audit quality. Proponents of restricting tenure argue that longer tenure impairs auditor independence and a "fresh look" from a new auditor results in higher audit quality. Validating this argument requires testing whether the observed difference in audit quality between a continuing auditor and a change in auditors is less than the theoretically expected difference in audit quality without impairment. Our findings provide the guidance necessary for developing such tests. Our results show that audit risk (the probability that fraud exists and goes undetected) is lower in both periods for the continuing auditor than with a change in auditors. More importantly, we show that across both periods, expected undetected fraud is lower for the continuing auditor than with a change in auditors.

Keywords: Strategic auditing, auditor tenure, fraud

JEL Classification: C72, M42

Suggested Citation

Patterson, Evelyn and Smith, J. Reed and Tiras, Samuel L., The Effects of Auditor Tenure on Fraud and Its Detection (November 30, 2018). Kelley School of Business Research Paper No. 17-21, Available at SSRN: https://ssrn.com/abstract=2935224 or http://dx.doi.org/10.2139/ssrn.2935224

Evelyn Patterson (Contact Author)

Indiana University-Kelley School of Business ( email )

801 West Michigan
Indianapolis, IN 46202
United States
317-278-7843 (Phone)

HOME PAGE: http://kelley.iupui.edu/faculty/FacultyProfile.cfm?netid=evpatter

J. Reed Smith

Kelley School of Business ( email )

801 W Michigan Street
BS 4002
Indianapolis, IN 46202
United States
317-274-0867 (Phone)
317-274-3312 (Fax)

Samuel L. Tiras

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

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