Estimating a Dynamic Model of Auditor Tenure and Misstatements

56 Pages Posted: 8 Dec 2018 Last revised: 1 Jul 2022

See all articles by Edwige Cheynel

Edwige Cheynel

Washington University in St. Louis - John M. Olin Business School

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: January 26, 2020

Abstract

We estimate an infinite-horizon dynamic oligopoly competition model of audit firm tenure and misstatements and we evaluate a policy counterfactual involving mandatory audit firm rotation. By reducing the value of retaining audit firms, mandatory rotation leads to large increases in auditor switches even before the term limit, implying increases in the switching costs borne by clients. Misstatement rates increase because audit firms endogenously lower the quality of audit services and newly hired audit firms discipline less. Overall, the model suggests caution when evaluating the costs and benefits of government oversight over the audit profession.

Keywords: Structural estimation; auditor tenure; mandatory audit firm rotation; misstatements; conditional choice probabilities; dynamic discrete choice

JEL Classification: K00, C13, M4

Suggested Citation

Cheynel, Edwige and Zhou, Frank, Estimating a Dynamic Model of Auditor Tenure and Misstatements (January 26, 2020). Available at SSRN: https://ssrn.com/abstract=3284807 or http://dx.doi.org/10.2139/ssrn.3284807

Edwige Cheynel

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Frank Zhou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
238
Abstract Views
1,696
rank
177,878
PlumX Metrics