An Analysis Of The Relationship Between The Auditor Tenure、Accounting Firm Tenure And The Audit Quality

Audit quality has always been the focus of the audit theorists and practitioners. Especially at the beginning of this century, a series of financial scandals, such as Enron and WorldCom, caused enormous loss and made people pay the unprecedented attention to the audit quality. Many countries around the world have taken lots of measures to improve the audit quality. There are many elements that affect the audit quality, among which the audit tenure is one of the most important. In order to improve the audit quality, audit rotation had been accepted by many regulators around the world. At present, there are many researches about this question in academia, but there is no unified conclusion. Different scholars use different research methods and research data, so the conclusions of the study are not the same. Audit tenure includes auditor tenure and accounting firm tenure. Viewing from the current literature, few scholars can study this issue from these two aspects simultaneously. This paper uses Shanghai’s A-stock market listed companies from 2000-2002 as the primary data, the absolute value of discretionary accruals as the alternative variable of audit’ quality, and adjusted cross-sectional Jones model to study the relationship between audit tenure and audit quality from the two levels of auditor and accounting firm simultaneously.At first, this paper analyzed the former relative research of domestic and abroad, and then on the basis of theoretical analysis proposed the hypothesis. This paper’s primary theory bases are rational economic man assumption and auditing contractual arrangements. Through the theoretical analysis, this paper thought that long audit tenure will not impair the audit quality. On the contrary, long audit tenure can improve the audit quality in some aspects. Moreover, there are still many negative factors in the audit rotation system, which may lead to the reduction of audit quality, so it is necessary to study the system further more.In the empirical test section, this paper tested the relationship between the absolute value of discretionary accruals and auditor tenure first. Auditor tenure was divided into three groups:short(tenure=5), Medium(6=tenure=10) and long (tenure>10). The results showed that with the increase of the auditor tenure, the absolute value of discretionary accruals rise, that is, the audit quality is improving. Then, after controlling the variable of auditor tenure, this paper tests the relationship between the absolute value of discretionary accruals and accounting firm tenure. The paper found that accounting firm tenure and discretionary accruals are positively correlated, which means the accounting firm tenure is negatively correlated with the audit quality. These conclusions do not support the audit mandatory rotation that has implemented in our country.The main contribution of this paper is that distinct the auditor tenure and the accounting firm tenure strictly. Moreover, after control the auditor tenure, this paper researches the relationship between the accounting firm tenure and the audit quality. This is a more important question, because the cost of accounting firm rotation is much bigger then that of auditor rotation. After consider the affection of auditor tenure, the test conclusion of this paper confirm that the long accounting firm tenure does not impair the audit quality, so it do not need to implement the audit rotation system. Previous studies did not address this issue directly.Though the conclusion of this paper does not support the audit rotation, the author found that the Audit tenure is negatively correlated with the absolute value of discretionary accruals, this means that short audit tenure may lead to the reduction of audit quality. Abroad studies have also confirmed this point, such as the American Association of Certified Public Accountants (AICPA) analyzed 406 audit failure eases occurred in 1979-1991, found that the most of audit failure occurred in the first and second year of audit tenure. Therefore, regulators should consider revising the audit rotation policy, regulating the minimum period of the audit tenure to improve audit quality.Because of the limitation of time and research ability, the paper still exist some inadequate aspects as following, and these are also the direction of future research.First, in.the study design, this paper use the absolute value of discretionary accruals to measure the audit quality, although this indicator is a better alternative role, many scholars believe that there are still some other indicators can measure the audit quality, such as:audit opinion, earnings response coefficient, the extent of earnings management etc. If the paper can use different indicators to measure the audit quality, the conclusions would be more convincing.Second, this paper select accounting firm type, firm size, listing periods, net operating cash flow and industry growth as control variables to reduce the impact of the other factors on discretionary accruals. But this is not enough. Many scholars have confirmed that there are many other factors could affect the audit quality, such as the audit pricing, the industry expertise and the size of accounting firms, corporate governance level and internal control systems. If the paper can select more control variables, the empirical results will be more instructive.Third, the primary samples of the paper come from the Shanghai A-share listed companies from 2000 to 2002. The sample is smaller, and not extended to all listed companies. In addition, the samples need to meet about four conditions:disclose the annual financial report; listing period over 1 year; the annual financial report acquire the Standard unqualified audit opinion; non-financial enterprises. This will make lots of listed companies be excluded from the research, so that the use of research results is limited. In addition, samples of this paper all come from the voluntary rotation environment. As we know, if you want to verify the effect of a policy, you should study and compare the change after the policy implementing, in that way the conclusions will be more reliable.