Audit Partner Tenure and Internal Control Reporting Quality: U.S. Evidence from the Not-for-Profit Sector

Posted: 3 Aug 2017

See all articles by Brian Fitzgerald

Brian Fitzgerald

Northeastern University - Accounting Group

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Anne Thompson

University of Illinois at Urbana-Champaign

Date Written: August 1, 2017

Abstract

This study examines the effects of audit partner tenure and audit partner changes on internal control reporting quality for large U.S. not-for-profit (NFP) organizations. Regulators contend that audit partners lose their objectivity over successive audits, reducing audit quality. A large body of research has examined this issue, primarily in non-U.S. jurisdictions, with mixed results. We examine the associations between audit partner tenure and audit partner changes and the incidence of reported internal control deficiencies (ICDs), the quality of internal control reports (following PCAOB audit quality indicators), and the severity of reported ICDs. We find negative associations between audit partner tenure and the incidence of reported ICDs, the quality of internal control reports, and the severity of reported ICDs. Together, these findings indicate that internal control reporting quality deteriorates with audit partner tenure. However, we find no association between audit partner changes and internal control reporting, which is consistent with partners lacking client specific knowledge in their first year with a client. Finally, we find no association between either audit partner tenure or changes and the likelihood of remediation. Our findings contribute large-sample U.S. evidence on the association between audit partner tenure and internal control reporting quality and provide useful information to government regulators, NFP boards charged with the oversight of the external auditor and internal controls, and NFP stakeholders.

Keywords: internal control opinions, audit partner tenure and rotation, audit quality, not-for-profit sector

JEL Classification: M40, M41, M42, M48

Suggested Citation

Fitzgerald, Brian and Omer, Thomas C. and Thompson, Anne, Audit Partner Tenure and Internal Control Reporting Quality: U.S. Evidence from the Not-for-Profit Sector (August 1, 2017). Contemporary Accounting Research, Forthcoming, Northeastern U. D’Amore-McKim School of Business Research Paper No. 3012032, Available at SSRN: https://ssrn.com/abstract=3012032

Brian Fitzgerald

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Anne Thompson (Contact Author)

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

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