Auditor Tenure, Coporate Governance And Earnings Quality

According to that lengthy auditor tenure may impair auditor independence and thusdecrease earnings quality, several countries have implemented audit-partner rotationrequirement. Based on the same argument, mandatory audit-partner rotation is enactedin China on Jan 1, 2004. However, the regulation of mandatory rotation is lack ofempirical support, and the effect of it has yet to be tested. This dissertation makesrelative studies on it including the following main contents and conclusions from threeaspects.Firstly, this dissertation makes an empirical testing on the relation between thetenure of Chinese Signature CPA (audit-partner), audit firm tenure and auditindependence or audit quality prior to the implementation of mandatory auit-partnerrotation. We find that the longer audit firm tenure instead of audit-partner tenure harmsauditor independence, and the negative impact mainly comes from non-big 10 auditfirms. Taking probability of issuing a going-concern audit opinion for distressedcompanies as proxy for audit quality, we find no linear relation between audit-partnertenure or audit firm tenure and audit quality. However, when we turn to use the directionand amount of abnormal working capital accruals as the proxy variable, we find thatlonger audit-partner tenure helps to produce higher audit quality. Moreover, we findevidence that there exists knowledge spillover effect within non-big 4 audit firms whenthe clients have incentive to increase their earnings. Auditor's accumulated knowledgeand expertise with longer audit firm tenure are more important for non-big 4 audit firmsto compensate their inability and improve audit quality. Our findings do not supportmandatory audit-partner rotation.And then, this dissertation makes a positive test on the effect of mandatoryaudit-partner rotation. Using abnormal accruals and unusual earnings as proxies forearnings quality, we find the earnings quality over the first year of mandatoryaudit-partner rotation is lower than before, but higher than that of voluntary audit firmswitch, not significantly different from that of non-mandatory rotation in the same yearand voluntary audit-partner switch. Taking the earnings response coefficient as a proxy for investor perceptions of earnings quality, we find that the earnings responsecoefficient from returns-earnings regressions subject to mandatory audit-partner rotationis lower than not subject to, not different from that of the year before mandatoryaudit-partner rotation and the voluntary audit-partner switch. So, the implementation ofmandatory audit-partner rotation has not get the achievement of enhancing audit qualityand earnings quality.Finally, this dissertation makes a comprehensive discussion of the joint impact ofcorporate governance and audit firm tenure on earnings quality. Under the condition ofgood corporate governance, taking abnormal accruals and earnings conservatism asproxies for earnings quality, our findings show that longer audit firm tenure can enhanceearnings quality, while under the condition of poor corporate governance, auditor tenuremakes no impact on earnings quality. However, taking earnings response coefficient as aproxy for investor perceptions of earnings quality, audit firm tenure makes no impact onearnings quality. The level of corporate governance makes no significant influence onearnings conservatism. But, using abnormal accruals and earnings response coefficientas proxies for earnings quality, we find earnings quality is higher with higher level ofcorporate governance. Therefore, we think the supervision to the companies of poorcorporate governance should be strengthened and their corporate governance structureshould be improved. Improving earnings quality through raising the level of corporategovernance is a practical strategy to solve the symptoms, but merely relying on themandatory audit-partner rotation maybe come to the opposite.