Audit firm tenure, auditor familiarity, and trust: Effect on auditee whistleblowing reporting intentions

Abstract

Mandatory audit firm rotation has been researched for decades with resulting opposition as well as support. Research has mainly treated mandatory auditor rotation at the firm macro level. We submit the client relationship length is comprised of firm tenure and audit team continuity, or auditor familiarity. Increased tenure, at the interorganizational or firm level and interpersonal or individual level, has been shown to increase trust; and further, trust is positively related to employee voice, such as speaking up about fraud (whistleblowing). We conduct an experiment examining whether increased audit firm tenure and auditor familiarity leads to increased trust, which enhances the willingness to whistleblow. We find evidence that suggests auditor familiarity enhances trust, which, in turn, positively influences an employee's intentions to whistleblow. This has important implications for the profession and for future research exploring mandatory audit firm rotation; in particular, the need to include auditor familiarity as a construct.

Auditor Independence Threats and Factors Affecting Independence

“…On the contrary, Wilson et al (2018) observed that too much familiarity could retrogressively impact the performance of the audit team which in turn negatively affect auditor's independence. According to Tobi et al (2016), a long audit-client relationship could lead to an alignment of the auditor's interest and that of its client which makes truly independent behaviour of the auditor a probability.…”

Research Topics in Accounting Fraud in the 21st Century: A State of the Art

“…The study of accounting fraud, using the Fraud Triangle tool, has been enriched and combined with contributions from other disciplines, such as ethics, morals and values [123,126], criminology, psychology and sociology [21,130], or combined with other frameworks such as the Crime Triangle (Mui and Mailley) [136].…”

Auditor Rotation Policies and Perceived Auditor Attributes in Texas School Districts

“…Carcello and Nagy (2004) find the most likely time horizon for fraudulent financial reporting lies in the first three years an auditor provides services, implying that longer audit tenure is advantageous to more accurate reporting. Auditor-client familiarity, along with longer audit tenure has been shown to positively affect trust, and in turn generate a greater propensity for client employees to report fraudulent activity (Wilson, McNellis, & Latham, 2018).…”