The Effect of Audit Partner and Firm Tenure on Audit Quality
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2017-08-17
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en
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In 2016 new regulation on mandatory auditor rotation is introduced to reform the European audit market after the financial crisis, accounting scandals and a loss of trust in the auditing profession. This thesis studies if the alleged threat of long-lasting client-auditor relationships is true and audit tenure negatively impacts audit quality, as proponents of mandatory auditor rotation claim. According to theory, auditor tenure can affect audit quality both negatively through a lower level of independence as positive through a lack of knowledge. Where prior research is mixed in methods and results, this thesis finds evidence for a negative association between tenure at level of the partner and audit quality. It also finds a non-linear relationship between audit tenure at the firm-level and audit quality that starts of positive, while it becomes negative as tenure increases. Audit quality is measured as discretionary accruals estimated by two versions of the Jones model. The results indicate that the effect through independence takes place at both the level of the partner- as firm-level, while the knowledge effect only appears at tenure at the level of the audit firm. These results are supportive towards mandatory auditor rotation, while the terms might need to be reconsidered.
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Faculteit der Managementwetenschappen