Audit Partner Tenure and Audit Quality

TLDR

Audit partner rotation is a widely adopted policy aimed at mitigating audit quality decline associated with prolonged tenure. This study uses Australian audit data to investigate how long audit partner tenure relates to audit quality. Audit quality was measured by the auditor’s propensity to issue going‑concern opinions, abnormal working‑capital accruals, and just‑beating earnings benchmarks. Long audit partner tenure is associated with a lower propensity to issue going‑concern opinions and some evidence of just‑beating earnings benchmarks, but not with abnormal working‑capital accruals.

Abstract

Rotation of audit partners is one of the main policy initiatives that has been implemented in many jurisdictions around the world to deal with concerns about audit quality. The basis of any requirement limiting the tenure of audit partners is that there is a reduction in audit quality associated with long periods of tenure. Using data from Australia, where the audit partner can be identified and for a period where partner rotation was not mandatory, we examine the association between audit quality and long audit partner tenure. The three measures of audit quality examined are the auditor's propensity to issue a going-concern audit opinion for distressed companies, the direction and amount of abnormal working capital accruals, and just beating (missing) earnings benchmarks. For long tenure observations we find a lower propensity to issue a going-concern opinion and some evidence of just beating (missing) earnings benchmarks, consistent with deterioration in audit quality associated with long audit partner tenure. There is no evidence of an association of long audit tenure with abnormal working capital accruals.