THE EFFECT OF AUDITOR TENURE ON AUDIT QUALITY

Introduction High-profile corporate failures that occurred at the beginning of this century have raised concern about the reliability of companies' financial statements. While the primary responsibility for preparing accurate financial statements rests with company management and boards, questions also have been raised about the quality and independence of external auditors. Regulators and standard setters have attempted to enhance audit quality through rules impacting on auditor independence (For example, the Sarbanes-Oxley Act of 2002) One factor the regulators are concerned that may impair auditor's independence is long auditor tenure (the length of the auditor client relationship). Their concern is that as the auditor tenure gets longer, auditors are more likely to compromise on their client's accounting and reporting choices in order to retain the client. Mandatory rotation of audit firms for a particular audit client is suggested as a means of improving audit quality through maintained independence and new fresh eyes on audits .However, the accounting profession has strongly resisted mandatory audit firm rotation, with potentially high costs of transition being provided as the prominent reason. The proponents of mandatory auditor rotation thus argue that setting a limit on the period of years an audit firm may audit a particular company's financial statements will improve auditor independence and audit quality. The opponents, however, argue that as auditors gain more experience from auditing the Archive of SID