Does Increased Audit Partner Tenure Reduce Audit Quality?

Audit partner rotation has been adopted in several countries, but the academic research has not investigated the relation between audit partner tenure and earnings quality. We investigate the relation using a sample of Taiwanese listed companies for which the audit report must show the audit partners’ names. We find a significantly negative relation between audit partner tenure and absolute discretionary accruals, a proxy for earnings quality. The negative relation mainly occurs after five to seven years of audit partner-client relationship. When audit firm tenure and audit partner tenure are analyzed simultaneously, audit firm tenure is not significantly related to absolute discretionary accruals but audit partner tenure is. Collectively, our evidence does not support the hypotheses that earnings quality decreases with audit partner tenure and that audit firm tenure decreases with earnings quality after controlling for audit partner tenure.

PurposeThe authors examine the association between two important audit partner characteristics and the readability of key audit matters (KAMs) disclosed in the audit reports. Specifically, the authors examine how the readability of KAMs is associated with audit partner tenure and workload.Design/methodology/approachThe authors conduct the study in the audit context of Norway and applied the Flesch reading ease scale to measure the readability levels of reported KAMs in the audit reports of companies listed on the Oslo Stock Exchange. Panel data estimation techniques are applied in estimating how partner tenure and workload are associated with the readability of KAMs. In addition, several robustness tests including different measures of KAMs readability and subsample analyses are performed.FindingsThe authors find that audit partner tenure and workload have significant associations with the level of KAMs readability. Specifically, the results show that the reported KAMs become more readable as the audit partner tenure increases but are less readable for partners with more workload. These results appear stronger in subsamples of KAMs typically noted to be more complex and associated with higher risks.Research limitations/implicationsAs KAMs represent the most significant issues in financial statements audit, these results provide important insights to stakeholders on the potential impact of audit partner tenure and workload on KAMs readability. Less readable KAMs could derail stakeholders' desire to bridge the information gap between auditors and users of the audit report. The uniqueness of this study lies in its focus on audit partner characteristics as opposed to the audit firm.Practical implicationsExcessive audit partner workload impairs KAMs readability.Originality/valueAs KAMs represent the most significant issues in financial statements audit, these results provide important insights to stakeholders on the potential impact of audit partner tenure and workload on KAMs readability. Less readable KAMs could derail stakeholders' desire to bridge the information gap between auditors and users of the audit report. The uniqueness of this study lies in its focus on audit partner characteristics as opposed to the audit firm.

This study explores the effect of audit partner specialist tenure on audit quality and the complementary effect of audit partner industry tenure and audit tenure. This study first examines audit partners’ effect on audit quality in the early period of their tenure, and we expect to see inferior audit quality during this period. Next, we investigate the moderating effect of audit partner specialist tenure on audit quality; that is, we inspect whether audit partner specialist tenure can compensate for audit partners’ insufficient professional knowledge in the early period of their tenure. This study discovers that since the second modification of the Taiwanese audit partner rotation system in 2009, audit partners’ first audit still generates negative effects on audit quality; however, after audit partners accumulate experience in the industry, they can effectively ameliorate the negative effect generated during their first audit. JEL classification numbers: M42. Keywords: Audit partner specialist tenure, Complementary effect, Audit partner tenure, Audit quality.

Independent and joint effects of audit partner tenure and non-audit fees on audit quality

The main purpose of this study is to provide evidence of how audit partner busyness and tenure are associated with audit efficiency. Based on a pooled OLS regression analysis of 232 observations from non-financial companies listed on the Omani capital market between 2013 and 2016, the results reveal no association between partner busyness and audit efficiency—although it does improve audit efficiency for clients of the Big 4 audit firms. Moreover, longer partner tenures are shown to significantly enhance audit efficiency. Given the lack of evidence currently available, this study reinforces the importance of examining audit outcomes at the level of audit partner, providing important insights into audit efficiency for regulators, companies, and auditors. Overall, this study is one of few presenting empirical evidence on the importance of the characteristics of partner incentives in the context of audit efficiency.

This study aims to investigate whether the Government Regulations No 20 the Year 2015 regarding the rotation of auditors will affect auditor independence. This study conducted observations on mining companies listed on the IDX by dividing into two observation periods, namely before and after the regulations applied. The results showed no change in auditors' independence to issue going concern audit opinions influenced by Audit Firm (AF) tenure. Both before and after the regulations applied. However, there are changes in audit partner (AP) tenure in influencing auditor independence before and after the regulations applied. The article suggests that audit partner supervision by authorities and professional associations needs to be improved based on the results of the study. It includes increasing supervision and supervision from Audit Firm leaders on all audit teams in the field, from junior auditors and senior auditors to in-charge managers.

The main purpose of the study is to examine the relationship between audit firm tenure and auditor reporting quality in Malaysia. This study employs well-established going concern model of logistic regression. Our findings show that audit firm tenure is positively significant relationship with auditor reporting quality. Future research should consider other importance variables that may affect the auditor reporting quality such as non-audit services, and audit partner tenure. However, in sum, this study is in line with the recent decision by the regulators not to regulate a mandatory audit firm rotation in Malaysia. This study provides a very importance implication and as a cornerstone to the regulators and policy makers in a developing country as the issue continues to be strong interest among them in improving the auditor independence.

This study uses the modified Jones Model to investigate the relationship between audit tenure and audit quality with special reference to Sierra Leone. To measure audit quality, discretionary accruals calculated by the Modified Jones model is used as a proxy, while audit tenure data is manually collected. In general, the results are consistent with the hypothesis that Audit quality does not change with the increasing audit firm tenure. On the whole, partner tenure is significantly and positively related to audit quality, indicating that longer audit partner tenure improves audit quality. The audit firm tenure is also positive with audit quality, though the evidence is not significant. Therefore, the results of this research do not support the proposal of audit firm rotation.

Partner industry specialization and audit pricing in the United Kingdom

The significance to prepare reliable information discloses the need to fall back on an external auditor and a quality auditing process that can caution against the management of earnings. In line with the business practice, auditing does not provide sufficient coverage for some earnings management (EM) activities that result in financial statement fraud. Over the years, capital markets around the globe have witnessed numerous corporate financial scandals largely because of financial and accounting figures' manipulation. This has led to casting doubt on the quality of published financial reports and questioning the ability of the audit process. Against this background, this study examined the relationship between audit quality and real earnings management of listed manufacturing companies in Nigeria. Specifically, this study evaluated the effect of audit firm size, audit firm industry specialization, audit firm tenure, and audit firm independence on real earnings management. The study sampled 38 out of 55 listed manufacturing companies that cut-across different sectors from 2013 to 2020. From the multivariate analysis, the findings revealed a significant relationship between audit quality (audit firm size and audit firm independence) with a p-value of 0.014 and 0.003 respectively. It was concluded that firms audited by Big-4 firms with independence attract greater publicity and tighter scrutiny; hence, companies tend to desist from managing their earnings. The study, therefore, recommended that the management of manufacturing firms in Nigeria should persist in engaging experience audit firms with international affiliations, and they should work strictly with the CAMA, 2020 as amended by rotating audit firms after every three years as this will promote the reliability of financial statement prepared by management, and finally reduce manipulation of earnings.

PurposeThis study aims to examine the Taiwan setting, where audit partners’ names are presented in the audit report and where audit committee formation is voluntary in the initial stage of audit committee reform. This paper investigates the effects of the formation of voluntary audit committees on the selection of individual audit partners, and, in turn, the audit quality. This contrasts with previous studies investigating the relationship between audit committees and auditor selection at the audit firm level.Design/methodology/approachThis paper samples all of Taiwan’s publicly listed firms for the period 2007–2012 and uses Heckman’s (1979) two-stage estimation model to achieve our objectives.FindingsUsing different characteristics of individual engagement partners as proxies for a higher quality auditor, the main empirical results show that voluntary audit committee formation is positively related to an industry specialist lead partner and a lead partner that has a larger number of clients. In addition, this paper also finds that voluntary audit committee formation has a positive impact on audit quality (proxied by discretionary accruals). The results suggest that the voluntary formation of an audit committee contributes positively to both auditor selection and audit quality. Furthermore, an additional test shows that the main empirical results are robust to a validity threat that firms that have good corporate governance prior to the formation of voluntary audit committees tend to select high-quality audit partners.Originality/valueThe paper contributes to the audit committee literature in the following ways: this paper takes advantage of Taiwan’s unique setting, where forming an audit committee is not compulsory in the initial stage of audit committee reform, to investigate the voluntary audit committee, auditor selection and audit quality; this paper expands on Abbott and Parker’s (2000) study of audit committee characteristics and auditor selection at the audit firm level by examining this relationship at the individual audit partner level; this paper responds to the call by Church et al. (2008) and DeFond and Francis (2005) who propose more studies on audit quality at the individual engagement partner level.

Companies restate when material misstatements are identified in previously issued financial statements. Misstatement research in Latin America is sparse, even though they are an important context to study this phenomenon. Chile’s corporate governance regulations are considered exemplars for Latin American countries but its auditing profession is not well developed. Thus, Chile provides an interesting context to study the complementary roles of audit and board governance affecting misstatements. Using a sample of 104 Chilean listed firms over seven years, our study finds that the board links and audit partner tenure negatively affect misstatements. Specifically, given the prevalence of related party transactions (RPTs) in conglomerates, the finding suggests that cross directors monitor high-value RPTs, but that this is not a substitute for auditor expertise. The findings raise questions about the advisability of mandating audit partner rotation to strengthen auditor independence because the results indicate that a short audit partner tenure leads to the auditor not developing client-specific knowledge. The study makes contributions to the corporate governance literature by highlighting that board monitoring is not a good substitute for auditor monitoring of financial reporting integrity, and suggesting the need for having licensing requirements to become an auditor.

Auditor Size, Auditor Quality, and Auditor Fee Premiums: Further Evidence from the Public Accounting Profession

This paper examines whether ethical violations committed by an audit partner and the public release of the resulting PCAOB disciplinary order affects the associated audit firms’ switching risk, audit fees and audit quality relative to other comparable audit firms. I examine the effects of ethical violations on audit firms affiliated with a sanctioned auditor (also referred to as affiliated audit firm or sanctioned auditor) at the city (office), MSA, state, regional, and national (firm) level in order to determine if there is a spill-over effect. My findings suggest that at no level in my analysis did the public disclosure of the PCAOB sanction have a significant effect on sanctioned auditors losing or gaining clients. Furthermore, results indicate that there is no significant association between having a certified public accountant (CPA) serve on the audit committee and an affiliated audit firm’s ability to retain clients or attract new clients. In regards to audit fees, findings suggest that audit fees were affected by the PCAOB sanction in that sanctioned auditors experienced audit fee growth after the sanction was made public. This result is consistent across all samples for all tests with the exception of the state and national (firm) samples. Again, there appears to be no significant association between having a CPA serve on the audit committee and audit fee growth rates. Finally, in the audit quality tests of discretionary accruals, there is no evidence to suggest that the sanctioned auditor’s audit quality was different from that of other non-sanctioned audit firms during the three-year window either before or after the sanction. However, the results of the audit quality test using restatements indicate that after the sanction was made public, restatements increased at the regional and national (firm) level for sanctioned firms vs. non-sanctioned firms. At the city (office), MSA and state level there appears to be no effect on restatements as a result of the public disclosure of the PCAOB sanction. Consequently, it is difficult to infer that higher restatements at the regional and national (firm) levels are associated with the PCAOB sanction.

Mandatory audit firm rotation sets a limit on the number of years a public accounting firm may audit a company’s financial statements. After a predetermined period, an accounting firm is no longer eligible to serve as the company’s auditor for a set time interval and a rotation of firms is required. The objectives of this study are: (1) to explore current audit appointment practices by audit firms in Bahrain; (2) to look into the opinions of audit firms in Bahrain on potential effects provided by implementing mandatory audit firm rotation (audit quality); and (3) to investigate audit firms’ views in implementing mandatory audit firm rotation in Bahrain. To achieve these objectives, a questionnaire was developed and distributed to respondents that consist of all auditors working in audit firms in Bahrain. The findings indicated that there is a significant relationship between mandatory audit firm rotation and quality of audit. The study also indicated that longer partner tenure makes the auditor’s performance lack the quality in the auditing process. The average mean for all questions of the hypothesis together is 2.73 with average standard deviation of 0.94 which is less than half of the mean. This means that there is no dispersion among respondents about the questions of the hypothesis. Also, the analysis shows that the t-value is 29.922, which is greater than the table critical value of t (1.66), and the p-value obtained is 0.000 which is less than the value of significance at p < 0.05. These results confirm statistically that there is a significant relationship, so the null hypothesis is rejected and the alternative hypothesis is accepted. this study focused on the impact of MAR on audit quality in Bahrain, further research may be directed towards examining the impact of MAR upon auditor independence and the cost of audit rotation. However, variables other than those included in the questionnaire of the study may affect the MAR.