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Audit Partner Tenure and Internal Control Reporting Quality: U.S. Evidence from the Not‐For‐Profit Sector

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  • Brian C. Fitzgerald
  • Thomas C. Omer
  • Anne M. Thompson

Abstract

This study examines the effects of audit partner tenure and audit partner changes on internal control reporting quality for large U.S. not‐for‐profit (NFP) organizations. Regulators contend that audit partners lose their objectivity over successive audits, reducing audit quality. A large body of research has examined this issue, primarily in non‐U.S. jurisdictions, with mixed results. We examine the associations between audit partner tenure and audit partner changes and the incidence of reported internal control deficiencies (ICDs), the quality of internal control reports (following PCAOB audit quality indicators), and the severity of reported ICDs. We find negative associations between audit partner tenure and the incidence of reported ICDs, the quality of internal control reports, and the severity of reported ICDs. Together, these findings indicate that internal control reporting quality deteriorates with audit partner tenure. However, we find no association between audit partner changes and internal control reporting, which is consistent with partners lacking client specific knowledge in their first year with a client. Finally, we find no association between either audit partner tenure or changes and the likelihood of remediation. Our findings contribute large‐sample U.S. evidence on the association between audit partner tenure and internal control reporting quality and provide useful information to government regulators, NFP boards charged with the oversight of the external auditor and internal controls, and NFP stakeholders. Les auteurs étudient l'incidence de la rotation des associés d'audit et de la durée de leur mandat sur la qualité de l'information relative au contrôle interne dans les grands organismes sans but lucratif (OSBL) des États‐Unis. Les autorités de réglementation estiment que les associés d'audit perdent leur objectivité au fil des audits successifs, ce qui réduit la qualité de l'audit. L’étude de cette question dans un important corpus de travaux de recherche, principalement à l'extérieur des États‐Unis, a produit des résultats mitigés. Les auteurs se penchent sur les liens entre la rotation des associés d'audit ainsi que la durée de leur mandat et l'incidence des déficiences du contrôle interne signalées, la qualité de l'information relative au contrôle interne (conformément aux indicateurs du PCAOB en matière de qualité d'audit) et la gravité des déficiences du contrôle interne signalées. Ils observent la présence de liens négatifs entre la durée du mandat de l'associé d'audit et l'incidence des déficiences du contrôle interne signalées, la qualité de l'information relative au contrôle interne et la gravité des déficiences du contrôle interne signalées. Ces résultats, pris dans leur ensemble, indiquent que la qualité de l'information relative au contrôle interne se détériore avec la durée du mandat de l'associé d'audit. Toutefois, les auteurs ne relèvent aucun lien entre la rotation des associés d'audit et l'information relative au contrôle interne, ce qui confirme le fait que les associés d'audit connaissent mal leurs clients lorsqu'ils en sont à leur première année de travail auprès d'eux. Enfin, ils n'observent aucun lien entre soit la rotation des associés d'audit soit la durée de leur mandat, et la probabilité de remédiation aux déficiences du contrôle interne. L'apport de l’étude réside dans les données que livre l'analyse d'un vaste échantillon d'entités des États‐Unis sur le lien entre la durée du mandat des associés d'audit et la qualité de l'information relative au contrôle interne ainsi que dans l'information utile qu'elle fournit aux autorités de réglementation gouvernementales, aux conseils d'administration des OSBL chargés de la surveillance des auditeurs externes et du contrôle interne, et aux parties prenantes des OSBL.

Suggested Citation

  • Brian C. Fitzgerald & Thomas C. Omer & Anne M. Thompson, 2018. "Audit Partner Tenure and Internal Control Reporting Quality: U.S. Evidence from the Not‐For‐Profit Sector," Contemporary Accounting Research, John Wiley & Sons, vol. 35(1), pages 334-364, March.
  • Handle: RePEc:wly:coacre:v:35:y:2018:i:1:p:334-364
    DOI: 10.1111/1911-3846.12348
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    Cited by:

    1. Elka Johansson & Peter Carey & George Tanewski & Iliyas Yusoff, 2022. "The effect of members on charities’ annual reporting: evidence from companies limited by guarantee in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1851-1886, April.
    2. Gipper, Brandon & Hail, Luzi & Leuz, Christian, 2017. "On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data," Research Papers repec:ecl:stabus:3588, Stanford University, Graduate School of Business.
    3. Gipper, Brandon & Hail, Luzi & Leuz, Christian, 2021. "Determinants and career consequences of early audit partner rotations," CFS Working Paper Series 676, Center for Financial Studies (CFS).

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