How Steep is the Audit Learning Curve? Evidence on the Effects of the Timing of Auditor Changes on Audit Quality

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 5: Effects of Auditor Transitions

Abstract

Prior literature suggests that audit quality is lower when auditor tenure is short, suggesting that the learning curve is steep on new audit engagements. We extend prior work by investigating the auditor’s learning curve and by asking whether the steepness of the learning curve varies with client complexity. We find that audit quality is not lower in the year of an auditor change, relative to companies that do not change auditors, if the new auditor is engaged before the end of the third fiscal quarter. However, companies that engage new auditors during or after the fourth fiscal quarter have a higher likelihood of misstatement than do companies that engage new auditors before the end of the third fiscal quarter or companies that do not change auditors. Furthermore, the decrease in audit quality associated with auditor changes late in the year does not persist into the second year of the audit engagement. In additional tests, we find that the decrease in audit quality observed among companies that change auditors late in the fiscal year is driven by companies with complex operations. Collectively, our results suggest that the learning curve associated with new audits is relatively steep (in that it exists for only one or two quarters, on average), and that the learning curve appears to be most pronounced for complex companies that engage new auditors late in the fiscal year.

Authors

• Timothy Andrew Seidel, University of Arkansas

• Linda Ann Myers, University of Arkansas

• Cory Alan Cassell, University of Arkansas

• James C Hansen, Weber State University