A Large Scale Reexamination of Auditor Tenure and Financial Reporting Fraud Pre- and Post-Sarbanes-Oxley Act of 2002

• In Event: Fraud Prevention and Audit

Abstract

We use a comprehensive fraud database from the Institute for Fraud Prevention (IFP) to test for the drivers of audit quality in fraud firms compared with their matched non-fraud firms. The large IFP data base enables us to do our investigation pre and post Sarbanes Oxley Act of 2002 (SOX 2002). Consistent with prior literature we find that short auditor tenure (defined as three years or less with the client firm) is positively related to the likelihood of fraud. We also find that compared with other audit firms, the Big-N firms are negatively associated with the likelihood of fraud. Our findings on long auditor tenure and firm size are not entirely consistent with those of Carcello and Nagy (2004). When we do not impose any cutoff for tenure, we find no relation between audit firm tenure and the likelihood of fraud. However, for auditor tenure of up to eight years, we find a negative relation between tenure and the likelihood of fraud, suggesting than the lack of significance in the association between tenure and the likelihood of fraud in our unrestricted sample is driven by auditor tenure greater than eight years. Also, we find a positive association between size and the likelihood of fraud, possibly reflecting larger clients’ bargaining power with auditors in contentious audit situations (c.f., Nelson et al. 2002).

Authors

• Mohammad J Abdolmohammadi, Bentley University

• Kwadwo N Asare, Bryant University