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ALOKE GHOSH
Office of Economic Analysis
DOOCHEOL MOON
State University of New York - Department of Business and Management
March 2003
Office of Economic Analysis, The Securities and Exchange Commission Working Paper
Abstract:
The recent rash of accounting irregularities has led many to assert that imposing mandatory periodic rotation of audit firms will improve the independence and objectivity of auditors, resulting in improved audit quality. However, auditor-expertise arguments suggest that auditors' judgment-based decisions improve with auditor tenure because of reduced information asymmetry between the auditor and client firm. Since the two conflicting perspectives predict opposite outcomes, we empirically examine whether auditor tenure affects audit quality and/or perceptions of audit quality.
We use both accounting- and market-based measures of audit quality. Since investor perceptions are key to regulatory concerns about independence, market-based tests provide additional insights beyond purely accounting-based tests of audit quality. We find that absolute discretionary accruals and the use of large negative special items to manage earnings decline with auditor tenure. Additional evidence from market-based results also indicates that investors and financial intermediaries consider audit quality to improve with auditor tenure. Collectively, our results are consistent with the claim that audit quality improves with auditor tenure, which suggests that legislating the duration of the auditor-client relationship might harm the capital markets.
Keywords: auditor tenure, audit quality, auditor independence, earnings management, earnings quality
JEL Classifications: M41, M43, M49
Working Paper Series
Abstract has been viewed 970 times
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Contact Information for ALOKE GHOSH (Contact Author)
Email address for ALOKE GHOSH
Office of Economic Analysis
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington , DC 20549
United States
202-942-8024 (Phone)
Contact Information for DOOCHEOL MOON
Email address for DOOCHEOL MOON
State University of New York - Department of Business and Management
School of Business
Academic Village, Suite D300
Old Westbury , NY 11568-0210
United States
Suggested Citation
Ghosh, Aloke and Moon, Doocheol, "Does Auditor Tenure Impair Audit Quality?" (March 2003). Office of Economic Analysis, The Securities and Exchange Commission Working Paper. http://ssrn.com/abstract=385880
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Est. download time |
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Apr 17, 2003 |
194K | 1.62 minutes |
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