An Empirical Study On The Effect Of Auditor Tenure And Auditors’ Industry Specialization On Audit Quality

Since the exposure of Enron financial scandal, more and more auditing failure cases began to be noticed, the auditor’s public appearance had faced great challenges. Pubic began to doubt the independence of the auditors, which has a great effect on audit quality. To ensure the auditing quality and maintenance the market order, the governors have made a few measurements, one of which is Auditor mandatory rotation system. More and more research had been carried out on the necessity of the policy. Some found that with the extension of auditor tenure, the audit quality will be improved. Davis et al.(2002) suggests that longer auditor tenure results in higher audit quality. With the extension of auditor tenure, Financial statements can be easily been controlled by the managers, and the profit predictions will be more accurate, with fewer errors. Lijun Xia and Xinyuan Chen(2006)suggests that auditor tenure has a non-line relationship with audit quality.As to the Auditors’ Industry Specialization, only a few researches have been carried out domestic. Some suggests that compared with the non-Industry Specialization auditors, the industry Specialization auditors’ auditing reports have better quality. While some found that there is no specific relationship between auditors’ industry specialization and audit quality. That is because:(1) domestic economic environment results in a non-independent auditor-clients relationship, and (2) domestic auditors’ industry specialization not well developed.In conclude prior studies on auditor tenure and auditors’ industry specializations are mostly about the accounting firms. But the accountants who take in charge the whole auditing procedure, and check the auditing reports have great effects towards auditing quality; as a result, this research is based on accountants’uninterrupted audit tenure, not on the accountants firms’tenure. And at the same time, we found that most prior studies, which are about auditor tenure and auditors’industry specializations, investigate these two factors separately, but this research suggest that both two factors have influence towards audit quality, and they have mutual effect, so we should consider both factors at the same time.Based on the relative research, this research has made following hypothesis: there is positive association between audit quality and auditors’industry specialization; as to the auditors with industry specialization, the extension of auditor tenure results in a worse audit quality,as to the auditors without industry specialization, in the early days of the auditor-clients relationship, with the extension of auditor tenure, audit quality will be improved, but later considering the influence of auditor independence, the audit quality will be damaged as the auditor-clients relationship established.This research takes listed companies in the period of 2007 to 2009 as samples, and use discretional accruals as a standard of audit quality, meanwhile, we use Industry market shares methods to measure the auditors’ industry specialization.This research suggests that (1) the auditors without industry specialization are associated with lower audit quality because of the lack of client-specific knowledge; the auditors with industry specialization are associated with higher audit quality;(2)as to the samples of industry specialization, the extension of auditor tenure results in a better audit quality, which is just opposite of the original hypothesis; as to the samples of non-industry specialization, in the early days of the auditor-clients relationship, with the extension of auditor tenure, audit quality will be improved, but later considering the influence of auditor independence, the audit quality will be damaged as the auditor-clients relationship established, which is just as the hypothesis.At the same time, this research has made the following contributions.First; it’s the first time to check the two factors’ influence towards audit quality at the same time in domestic financial market; second, it’s also the first time to use auditor’s Industry market shares measure the auditor’s industry specialization. Third, the research has figured out a threshold value to distinguish whether the auditor with industry specialization or not. Finally, according to research, the auditor tenure between 2 and 3 years will lead to higher audit quality. But according to the descriptive statistics,53.65% auditors’uninterrupted tenure are shorter than one year,38.63% auditors’ uninterrupted tenure are between 2 and 3 years.as a result, no matter the samples with industry specialization or the samples without industry specialization, the auditors’ uninterrupted tenure is too short in domestic market.But also this research has some shortcomings as followings:(1) the research sample only conclude 2007-2009 period, considering the system risk of firms and the environment are quite different from year to year, as a result, the conclusion are not appropriate to other years. (2) This research use auditor’s Industry market shares of last year to measure the auditor’s industry specialization. If the auditor didn’t audit specific companies in this industry last year, he will considered as a non-industry specialization auditor, so this research use the auditor’s auditing experience to be as a substitute of industry specialization the this is not very appropriate. (3) This research only tests the association between accountants’ uninterrupted auditor tenure and audit quality, without the consideration of accounting firms’uninterrupted auditor tenure. But accounting firms’ uninterrupted auditor tenure is also a very significant factor which has great effects towards audit quality.