Audit Partner Tenure, Audit Firm Tenure, and Discretionary Accruals: Does Long Auditor Tenure Impair Earnings Quality?

Posted: 5 Sep 2007

See all articles by Chih-Ying Chen

Chih-Ying Chen

Singapore Management University - School of Accountancy

Chan-Jane Lin

National Taiwan University - College of Management

Yu-Chen Lin

National Cheng Kung University - Accounting

Date Written: July 2007

Abstract

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.

Keywords: audit partner tenure, audit firm tenure, auditor rotation, discretionary accruals, earnings quality

JEL Classification: M49, M41, M43, M47

Suggested Citation

Chen, Chih-Ying and Lin, Chan-Jane and Lin, Yu-Chen, Audit Partner Tenure, Audit Firm Tenure, and Discretionary Accruals: Does Long Auditor Tenure Impair Earnings Quality? (July 2007). Available at SSRN: https://ssrn.com/abstract=1011336

Chih-Ying Chen (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
(+65)68280987 (Phone)
(+65)68280600 (Fax)

Chan-Jane Lin

National Taiwan University - College of Management ( email )

Department of Accounting
1 Roosevelt Rd. Sec. 4
Taipei 106
Taiwan
886-2-3366-1115 (Phone)
886-2-2363-3640 (Fax)

Yu-Chen Lin

National Cheng Kung University - Accounting ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan
+886-6-2757575 ext.53442 (Phone)
+886-6-2744104 (Fax)

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