An Empirical Study On The Relationship Between Audit Tenure And Audit Quality

With the exposure of a series of financial scandal cases, US has appeared the famous bill-"Sarbanes-Oxley Bill"in 2002, from now on, there are increasing researches in domestic and abroad focusing on the relation between audit tenure and audit quality. But, today, it has not reached a consensus yet.Based on the contract theory and principal-agent theory as supporting theory. Referring to research methods and conclusions of the related reference, we combined the Chinese unique background. This paper proposed hypothesis to test the relationship between audit tenure and audit quality by empirical approach. Purpose of this paper is to explore the suitable audit tenure, which contributes to maintain high audit quality in our country, and further offeres valuable suggestions for the development of independent audit and supervision of stock market.This paper, using the data of those listed firms from Shenzhen and Shanghai markets that received clean audit opinions during 2003 to 2005 in the Chinese Securities Market.Estimated the discretionary accruals from the financial reports of listed firms in China, by the adjusted Cross - sectional Jones Model, and the discretionary accruals were compartmentalized into two calculation caliber of exclusive underline terms-DA1 and inclusive underline terms-DA2.Then, measuring audit quality by the discretionary accruals calculated by the Cross - sectional adjusted Jones Model to investigate the relationship between audit tenure and audit quality.We find that, after controlling the influence of other variables,(1)the relationship between audit tenure and the absolute value of discretionary accruals (︱DA︱)is not linearity,so, the relationship between audit tenure and audit quality is not linearity.(2) conducting the positive earnings management, the relationship between audit tenure and the positive value of discretionary accruals(DA+) is"U"shape, so, the relationship between audit tenure and audit quality is inverse"U"shape. Further analysis indicates that, when audit tenure is less than 6 years, the relationship between audit tenure and DA+ is remarkably negative, which means auditor can control earnings management, autit quality increase year by year. when audit tenure is more than 6 years, the relationship between audit tenure and DA+ is remarkably positive, which means auditor cannot control earnings management, autit quality decrease year by year. (3) conducting the negative earnings management, the relationship between audit tenure and the negative value of discretionary accruals(DA-) is inverse"U"shape, so, the relationship between audit tenure and audit quality is"U"shape. (4) The effet of the examination model which is using inclusive underline terms-DA2 as the dependent variable to test the relationship between audit tenure and audit quality is better than the examination model which is using exclusive underline terms-DA1.