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Does auditor tenure affect accounting conservatism? Further evidence

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  • Li, Dan

Abstract

Accounting regulators are concerned about the potential threat of long-term auditor-client relationships on auditor independence, leading to lower audit quality. Jenkins and Velury (2008, hereafter JV) document a positive association between the conservatism in reported earnings and the length of the auditor-client relationship. A primary objective of this study is to extend JV by providing evidence that the relationship between conservatism and auditor tenure is not unique for all firms. In particular, this study finds that the positive association only exists for large firms or firms strongly monitored by their auditors, while for smaller firms or firms weakly monitored by their auditors, I observe a significantly negative association between auditor tenure and conservatism. Overall, the findings suggest that client importance plays an important role in long-term auditor-client relationship. Long-term auditor-client relationship imposes greater threat to auditor independence for smaller clients weakly monitored by auditors than larger clients. Hence, the study provides some support to the regulators who are concerned about the potential negative impact of auditor tenure on audit quality and the rule of mandatory audit firm rotation.

Suggested Citation

  • Li, Dan, 2010. "Does auditor tenure affect accounting conservatism? Further evidence," Journal of Accounting and Public Policy, Elsevier, vol. 29(3), pages 226-241, June.
    • Handle: RePEc:eee:jappol:v:29:y:2010:i:3:p:226-241
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    Cited by:

    1. Liangcheng Wang & Siying Li & Bikun Zhang & Yifan Zhang & Tao Peng, 2024. "The effect of auditor experience on stock price crash risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 411-444, March.
    2. Nikolaos Anastasopoulos & Dimitrios Asteriou, 2021. "Optimal dynamic auditing based on game theory," Operational Research, Springer, vol. 21(3), pages 1887-1912, September.
    3. Casterella, Jeffrey R. & Johnston, Derek, 2013. "Can the academic literature contribute to the debate over mandatory audit firm rotation?," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 108-116.
    4. TINA M. Jose Vega & Dennis M. López, 2012. "Evaluating The Effect Of Industry Specialist Duration On Audit Quality And Audit Fees," Working Papers 0023, College of Business, University of Texas at San Antonio.
    5. Habib, Ahsan & Jiang, Haiyan, 2015. "Corporate governance and financial reporting quality in China: A survey of recent evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 24(C), pages 29-45.
    6. Sun, Yan & Xu, Weihong, 2012. "The role of accounting conservatism in management forecast bias," Journal of Contemporary Accounting and Economics, Elsevier, vol. 8(2), pages 64-77.
    7. Mahmoud Moeinadin & Jamal Barzagari Khaneghah & Jamal Tabatabaei Mazraehno, 2013. "Investigating the Effect of Audit Quality on Over-investment Using Measures of Auditor Specialty and Audit Tenure for Listed Companies in Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(4), pages 229-244, October.
    8. Booker, K., 2018. "Can clients of economically dependent auditors benefit from voluntary audit firm rotation? An experiment with lenders," Research in Accounting Regulation, Elsevier, vol. 30(1), pages 63-67.
    9. Alhababsah, Salem & Alhaj-Ismail, Alaa, 2023. "Does shared tenure between audit committee chair and engagement partner affect audit outcomes? Evidence from the UK," The British Accounting Review, Elsevier, vol. 55(2).

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