An examination of the influence of mutual CFO/audit firm tenure on audit quality |
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| Institution: | 1. University of Kentucky, Gatton College of Business and Economics, Von Allmen School of Accountancy, 423K GBE, Lexington, KY 40506, United States;2. University of Louisville, College of Business, RW 273, Louisville, KY 40292, United States;1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. School of Accountancy, Central University of Finance and Economics, Beijing 100081, China;2. SKEMA Business School, 99 Ren’ai Road, Suzhou 215123, China;1. Data & Text Mining Laboratory, Jerusalem School of Business Administration, Israel;2. Rutgers Business School – Newark and New Brunswick, Rutgers University, Department of Accounting and Information Systems, United States;3. Stern School of Business Administration, New York University and, QMA LLC, United States;4. Freeman College of Management, Bucknell University, United States;1. International University of Monaco, OMNES Education, 14, rue Hubert Clerissi, 98000 Monaco, Monaco;2. Department of Economics, Management, Institutions (DEMI), University of Naples “Federico II”, Monte S. Angelo University Campus, Naples (Italy);1. Clara R. Toppan Professor of Accounting, College of Business, University of Wyoming, Laramie, WY 82071-3275, USA;2. Professor of Accounting, W.P Carey School of Business, Arizona State University, Tempe, AZ 85287, USA;3. Professional Advisory Board Professor of Accounting, W.P Carey School of Business, Arizona State University, Tempe, AZ 85287, USA |
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| Abstract: | This study examines whether the extent of professional relationships between an audit firm and their client’s CFO influences audit quality. If regulators’ concerns that the relationship that develops over time between an audit firm and their client’s CFO impairs auditor judgment are justified, then we should observe a negative relationship between the length of audit firm’s tenure with their client’s CFO and audit quality. The results suggest that mutual audit firm-CFO tenure is associated with lower audit quality measured by the magnitude of discretionary accruals, the reduced incidence of issuance of going-concern audit opinions for distressed companies, and an increased likelihood of the receipt of an Accounting and Auditing Enforcement Release (AAER) from the US. Securities and Exchange Commission (SEC). These affects are concentrated in a subsample of firms with higher levels of corporate governance concerns. These findings have implications for policies related to audit firm rotation. Specifically, the results suggest that regulators need to consider other relationships underlying audit firm tenure, such as the relationships that form between audit firm and client personnel, when evaluating audit firm rotation policies. |
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