Audit Tenure Andaudit Quality:analysis From The View Of Investors

The research about the relationship of audit tenure and audit quality can be traced back to the 20th century 60s. In the early 21th century, a series of company financial fraud cases seriously affected the investor's confidence in capital markets. The U.S. congress passed the world-famous"Sarbanes-Oxley Act"(SOX) which could improve the accuracy and reliability of listed companies'accounting information disclosure, as well as protect the interests of investors and restore the investors'confidence. Furthermore, audit tenure issue was included in this act as a measure to improve the audit quality. This action attracts the parties'attentions to audit tenure and audit quality. So in our country, what kind of relationship exists between audit tenure and audit quality? Investors as the main users of financial reporting information, their perceptions of audit quality are very important to maintain the trust to financial report of other users. Therefore, what kind of reaction they will make to the length of audit tenure? In this article, we studied the influence of audit tenure on audit quality by using the equity risk premium as a measure of audit quality from the view of investor, in order to try to find the way which is suitable for our country to improve the audit quality and provide assistance for the healthy development of audit market and the securities regulation.In this paper, we used all of the A-share listed companies as study sample and studied whether the investors price the audit firm tenure by analyzing the relationship between audit tenure and equality risk premium. We found that there is non-linear relationship between the audit tenure and the equity risk premium, the critical value of 8.36 years. That is, when the audit tenure is less than the critical value, the equity risk premium becomes more and more lower as the tenure increases. On the contrary, if audit tenure exceeds the critical value, equity risk premium will be increased gradually with the increase in the audit tenure. This shows investors believe that too short or too long tenure will have negative effects on audit quality, and there exists an optimal period of 8.36 years for audit tenure. Therefore, the conclusions of this paper has an important significance for policy makers to actively implement the audit firm rotation as reference, and set a goal about the scope of supervision for the regulator. That is, those who make a frequent rotation of audit firms or provide long term (more than 8 years ) service for the company will be a key targets to be monitored, whether audit firms or companies which accept the audit service.