Exploring the Term of the Auditor-Client Relationship and the Quality of Earnings: A Case for Mandatory Auditor Rotation?

Posted: 17 Feb 2003

See all articles by James N. Myers

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Abstract

In this study, we document evidence on the relation between auditor tenure and earnings quality using the dispersion and sign of both absolute Jones-model abnormal accruals and absolute current accruals as proxies for earnings quality. Our study is motivated by calls for "mandatory auditor rotation" which are based on concerns that longer auditor tenure reduces earnings quality. Multivariate results, controlling for firm age, size, industry growth, cash flows, auditor type (Big 8 vs. non-Big 8), industry, and year, generally suggest higher earnings quality with longer auditor tenure. We interpret our results as suggesting that, in the current environment, longer auditor tenure on average results in auditors placing greater constraints on extreme management decisions in the reporting of financial performance.

Keywords: auditor tenure, earnings quality, audit quality, mandatory rotation

JEL Classification: M41, M49

Suggested Citation

Myers, James N. and Myers, Linda A. and Omer, Thomas C., Exploring the Term of the Auditor-Client Relationship and the Quality of Earnings: A Case for Mandatory Auditor Rotation?. The Accounting Review, Vol. 78, No. 3, 2003. Available at SSRN: https://ssrn.com/abstract=378342

James N. Myers (Contact Author)

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
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

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