Incumbent Auditor Independence and Predecessor Auditor Tenure

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Abstract

Prior literature examines incumbent auditor tenure and its own independence. In this paper, we examine predecessor auditor tenure and incumbent auditor independence. We find a negative association between predecessor auditor tenure and likelihood of incumbent auditor change. We also find a positive (negative) association between predecessor auditor tenure and incumbent auditor going concern opinions (Type II errors) among financially distressed firms. Our findings indicate that predecessor auditor tenure signals client commitment to the auditor in the audit process and that this commitment facilitates greater incumbent auditor independence among financially distressed firms. Our findings are important as regulators, investors, and other stakeholders attempt to better understand auditor independence. Our findings also highlight that mandatory auditor rotation may limit a client’s ability to signal its commitments to the auditor-client relationship.

Authors

• Brian Matthew Burnett, University of North Carolina - Charlotte

• Gregory W Martin, University of North Carolina-Charlotte

• David Reppenhagen, University of North Carolina at Charlotte

• Paul N Tanyi, University of North Carolina-Charlotte