Audit partner tenure, audit firm tenure, and discretionary accruals: Does long auditor tenure impair earnings quality?

By Chih-Ying Chen, Chan-Jane Lin, Yu-Chen Lin. 2008

575 citations recorded by the source corpus.

Mandatory audit partner rotation has been adopted in certain countries while audit firm rotation is still being debated in many places. Most of the extant research on the relation between auditor tenure and earnings quality provides evidence at the audit firm level. However, since audit firm tenure is correlated with partner tenure and audit firm rotation is more costly than partner rotation, it is important to know whether earnings quality is related to audit firm tenure, partner tenure, or both. We investigate this issue using a sample of Taiwanese companies for which the audit report must be signed by two partners with their names disclosed in the report. Using performance adjusted discretionary accruals as a proxy for earnings quality, we find that the absolute and positive values of discretionary accruals decrease significantly with partner tenure. After controlling for partner tenure, we find that absolute discretionary accruals decrease significantly with audit firm tenure. Our findings are not consistent with the arguments that earnings quality decreases with extended audit partner tenure and that audit firm rotation in addition to partner rotation would improve earnings quality. Our results are robust to alternative ways of measuring partner tenure under the dual signature system. However, since the audit reports do not disclose which partner is responsible for maintaining the auditor-client relationship, measurement errors in partner tenure remain an issue that cannot be fully addressed in the context of our study.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/4fe5488415cd9dcf56ba9228fda2990c9e1c3963

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Citations in the corpus

Crash Risk and the Auditor-Client Relationship (2017, background): “…crucial issues that necessitate specific attention (Knapp 1991; Johnstone et al. 2001; Johnson et al. 2002; Beck and Wu 2006; PricewaterhouseCoopers 2002, 14 See also St. Pierre and Anderson (1984), Mansi et al. (2004), Knechel and Vanstraelen (2007b), Gul et al. (2007), and Chen et al. (2008).”
Family Control, Socioemotional Wealth and Earnings Management in Publicly Traded Firms (2014, methodology): “R(2) statistics of this magnitude are standard in discretionary accruals models in accounting research (e.g., Ashbaugh et al. 2003; Bergstresser and Philippon 2006; Chen et al. 2008; Collins and Hribar 2002).”
Capital Market Consequences of Audit Partner Quality (2015, unknown): “16 follow Chen et al. (2008) and define the lead partner as the partner who has the longest continuous tenure with the client for the period of 1995-2005.”
Do school ties between auditors and client executives influence audit outcomes (2016, unknown): “Third, if auditor competence (due to a lack of client-specific knowledge) is lower in the initial audit engagement (Chen et al., 2008; Geiger and Raghunandan, 2002), it would”
Client importance and audit partner independence (2012, methodology): “To test H1, we follow Chen et al. (2008) and use absolute and signed abnormal accruals”
The effect of audit adjustments on earnings quality: Evidence from China (2016, background): “…to become negative when the 3 Studies include: Ashbaugh et al. (2003), Becker et al. (1998), Caramanis and Lennox (2008), Carey and Simnett (2006), Chen et al. (2008, 2011), Chi et al. (2009), Chung and Kallapur (2003), Francis and Wang (2008), Francis and Yu (2009), Francis et al. (2013),…”
Audit Quality: Insights from the Academic Literature (2013, background): “Research in this area has documented both a positive (Chen et al. 2008; Chi et al. 2009) and negative (Carey and Simnett 2006) relation between auditor partner tenure and financial reporting quality.”