Audit Firm Tenure and Audit Quality: New Insight from Quantile Regressions

• In Event: Auditor Tenure and Turnover

Abstract

We investigate the differential impact of auditor tenure across the distribution of audit quality using a quantile regression approach. Given that audit failure is a relatively low likelihood event, a consideration of the impact of interventions at the mean is interesting but does not aid in an understanding of client-firms at the lower (or higher) end of the audit quality distribution. Using a quantile regression approach and for a sample of U.S. firms from 1992-2012, we find that the effect of audit tenure on audit quality varies across the audit quality distribution. Consistent with the independence effect dominating the knowledge effect, we find evidence that at the poor audit quality conditional distribution, poor audit quality leads to even poorer audit quality with increasing years of auditor tenure. However, we find little evidence of the knowledge effect prevailing over the independence effect even at the good audit quality conditional distribution. Where such an effect can be found, the improvement in audit quality with additional years of auditor tenure reverses at 17 years.

Authors

• Elizabeth Carson, UNSW Australia

• Per Christen Tronnes, Norwegian School of Economics

• Leon Wong, UNSW Australia