The Relationship between Auditor Tenure and Audit Quality Implied by Going Concern Opinions

Abstract

The debate continues about the relationship between auditor tenure and audit quality in spite of extensive empirical evidence examining audit failures, earnings management, and the issuance of auditor's opinions. Most recent evidence suggests that long auditor tenure does not have a negative impact on audit quality. However, most of the available evidence has been accumulated based on publicly listed companies in the U.S. We examine the effect of auditor tenure on audit quality for private companies in Belgium, an environment where we believe auditor tenure is more likely to have a negative effect on audit quality. We use the likelihood of an auditor issuing a going concern opinion as an indicator of audit quality. Using a sample of stressed bankrupt companies, and stressed nonbankrupt companies, the results indicate that auditors do not become less independent over time nor do they become better at predicting bankruptcy. In balance, the evidence for tenure either increasing or decreasing quality is weak.

Audit Tenure: An Assessment of its Effects on Audit Quality in Nigeria

“…Consequently, the length of auditor and client relationship is still at a much more discretionary level. Though other findings such as Walker, Lewis and Casterella, (2001), Knechel and Vanstraelen (2007) have also argued that auditor rotation may not necessarily improve audit quality and the effect of tenure does not have either an increasing or decreasing effect on audit quality and at best the effect is weak. The study finding is nevertheless at variance with conclusions made by Geiger and Raghunandan (2002); Johnson, Khurana and Reynolds (2002) and Myers, Myers and Omer (2003) that short auditor tenure is associated with lower quality audits.…”

“…Researchers have also used estimated discretionary accruals as a surrogate for audit quality (Dechow & Dicheve, 2002;and Krushman, 2003) assuming that higher estimated discretionary accruals reflect lower earnings quality and thus lower audit quality. Knechel and Vanstraelen (2007) note that audit quality is measured by the propensity of the auditor to issue a going concern opinion. Finally, Modrich, Jackson and Roebuck (2007) note that true audit quality is when the audit does not result in a type 1 error: a failing company being given an unqualified report or a type 11 error: a non-failing company being given a qualified report.…”

Theorizing Financial Crimes as Moral Actions

“…see. Chung, Farrar, Puri, & Thorne, 2010;Cortese, Irvine, & Kaidonis, 2010;Humphrey, Loft, & Woods, 2009;Knechel &Vanstraelen, 2007).…”

Audit tenure and audit Qualifications in a low litigation risk setting: An analysis of the Spanish market

“…They observed significantly more audit reporting failures in the earlier years of the auditor-client relationship than when auditors had served these clients for longer tenures. However, Knechel and Vanstraelen (2007) came to a different conclusion with a sample of Belgian firms, their results showing that the decision of the auditor to issue a going-concern opinion to a company entering bankruptcy was not affected by tenure. They also addressed type I errors defined as issuing a going-concern opinion to a company that did not file bankruptcy in the following year.…”

“…Previous research has addressed the relationship between audit tenure and the nature of the audit report by focusing on audit qualifications for reasons of going concern and analyzing financially distressed companies [Menon and Schwartz, 1985;Carcello and Neal, 2000;Vanstraelen, 2000;Vanstraelen, 2002;Ruiz-Barbadillo et al, 2004;Carey and Simnett, 2006;Knechel and Vanstraelen, 2007;Lim and Tan, 2010;Gul et al, 2011]. Such approach faces some advantages and disadvantages.…”