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Does auditor tenure affect accounting conservatism? Further evidence

Dan Li

Journal of Accounting and Public Policy, 2010, vol. 29, issue 3, 226-241

Abstract: Accounting regulators are concerned about the potential threat of long-term auditor-client relationships on auditor independence, leading to lower audit quality. Jenkins and Velury (2008, hereafter JV) document a positive association between the conservatism in reported earnings and the length of the auditor-client relationship. A primary objective of this study is to extend JV by providing evidence that the relationship between conservatism and auditor tenure is not unique for all firms. In particular, this study finds that the positive association only exists for large firms or firms strongly monitored by their auditors, while for smaller firms or firms weakly monitored by their auditors, I observe a significantly negative association between auditor tenure and conservatism. Overall, the findings suggest that client importance plays an important role in long-term auditor-client relationship. Long-term auditor-client relationship imposes greater threat to auditor independence for smaller clients weakly monitored by auditors than larger clients. Hence, the study provides some support to the regulators who are concerned about the potential negative impact of auditor tenure on audit quality and the rule of mandatory audit firm rotation.

Date: 2010
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