Is long auditor tenure beneficial or detrimental for audit quality? This is the question we are trying to address in this article. The impact of audit firm tenure and auditor rotation on audit quality have long been debated both within academia and by regulators in the US and globally. The debate has centered on two main opposing views. The positive view argues that longer auditor tenure leads to a higher quality audit via a learning effect, due to the accumulation of client-specific knowledge over time. An auditor that is more knowledgeable of the client is more likely to promptly identify financial reporting problems. Accordingly, regulatory intervention that limits the length of the auditor-client engagement is undesirable. The negative view argues that long auditor tenure may have a detrimental effect on audit quality for two reasons. First, long auditor tenure may lead to the development of economic and social bonds between the auditor and the client company due to continuous involvement. This, in turn, has the potential to impair the auditor’s objectivity and increase the likelihood of audit failure. Second, because the audit is performed year in and year out, the auditor may become complacent, due to the repetitive nature of the task. A complacent auditor, in turn, may fail to promptly detect misreporting, leading to audit failure. In contrast, a new auditor would bring a fresh viewpoint, which will benefit the audit engagement. Consequently, under the negative view, it is desirable to limit the length of the auditor-client engagement.
Posted by Zvi Singer (HEC Montreal) and Jing Zhang (University of Alabama), on Tuesday, June 19, 2018
Editor's Note: Zvi Singer is associate professor of accounting at HEC Montreal, and Jing Zhang is assistant professor of accounting at the University of Alabama in Huntsville. This post is based on their recent article, published in The Accounting Review.