Auditor Tenure and Accounting Conservatism: Evidence from Greece

• In Event: Auditing II

Abstract

Auditor tenure has been the subject of considerable debate particularly since the accounting failures early in the 21st century (e.g., Enron, WorldCom, etc.). It is useful to examine the relationship between auditor tenure and financial reporting quality due to the recent European Commission (EC) (2011) regulation draft where the EC is considering mandatory auditor rotation. In this study, we follow Li (2010) and examine the relationship between auditor tenure and conservatism, using two measures of conservatism originally used in Jenkins and Velury (2008). They use the timeliness of earnings and persistence of earnings as measures of conservatism, and then re-estimate regressions for each subsample based on client-importance, measured by the ranking of client sales among all clients audited by the firm. Our results using firms in Greece are chiefly consistent with the findings of Li (2010). Conservatism increases as auditor-client relationship lengthens, but primarily for those clients considered most important. These results hold when using alternate measures of conservatism. The issue of longer audit tenure having a negative impact on audit quality may only apply to less important firms which are often smaller and receive less monitoring by the auditor. It is important to gain a deeper understanding of the relationship between auditor tenure and financial reporting quality for firms in Greece, not only due to the potential auditor rotation mandate by the EC (2011) but also due to important issues such as the recent liberalization of the audit market in Greece, the scrutiny of the Greek audit profession as a result of corporate scandals and the collapse of the Athens Stock Exchange, and because Greece has been found in prior studies to have a high country ranking for earnings management practices.

Authors

• Pervaiz Alam, Kent State University

• Anastasia Maggina

• Laura K. Rickett, Cleveland State University