The Relationship between Auditor Tenure and Audit Quality Implied by Going Concern Opinions

TLDR

Debate persists over whether auditor tenure affects audit quality, despite extensive evidence on audit failures, earnings management, and auditor opinions. This study investigates how auditor tenure influences audit quality for private Belgian firms, where tenure may negatively affect quality. Audit quality is measured by the probability that an auditor issues a going‑concern opinion. Results show that auditor tenure neither reduces independence nor improves bankruptcy prediction, and overall evidence for tenure affecting audit quality is weak.

Abstract

The debate continues about the relationship between auditor tenure and audit quality in spite of extensive empirical evidence examining audit failures, earnings management, and the issuance of auditor's opinions. Most recent evidence suggests that long auditor tenure does not have a negative impact on audit quality. However, most of the available evidence has been accumulated based on publicly listed companies in the U.S. We examine the effect of auditor tenure on audit quality for private companies in Belgium, an environment where we believe auditor tenure is more likely to have a negative effect on audit quality. We use the likelihood of an auditor issuing a going concern opinion as an indicator of audit quality. Using a sample of stressed bankrupt companies, and stressed nonbankrupt companies, the results indicate that auditors do not become less independent over time nor do they become better at predicting bankruptcy. In balance, the evidence for tenure either increasing or decreasing quality is weak.