Research On The Relationship Of Audit Firm Tenure And Audit Quality

A series of listed companies’ financial fraud cases occurred worldwide at the beginning of this century, the CPA industry reputation had been unprecedented impact and triggered a crisis of confidence of the CPA profession. As we think of the reasons for the failure of the audit which caused by accountants was not found or not disclosure of listed companies’ financial fraud. We often referred to the relationship between audit tenure and audit quality, as longer audit term will reduce the audit quality. Therefore, at home and abroad there is a reform initiative for audit quality which is the audit mandatory rotation. This is also the issues which the regulatory authorities, academia, and the practitioners particular concern in recent years. In order to improve audit quality, China has implemented a mandatory rotation of signing certified public accountant, that the signing certified public accountant or audit project leader provide audit services for a relevant agencies shall not exceed five years; and the signing certified public accountant shouldn’t continue working for an new listed company more than two complete fiscal year after the company’s listed. However, that the signing the rotation of CPA can really improve audit quality is a matter of opinion, And it need empirical evidence to test the rotation of CPA. The main purpose of this paper is to explore the relationship between the audit firm tenure and audit quality in the Chinese context, and provide some empirical evidence to the relevance of the regular rotation of accounting firms.On the basis of theoretical analysis, we propose the theory of the logical framework that with the extendsion of the audit firm tenure, the audit quality will be changed, and put forward the assumption of empirical research. We select the listed companies of Shanghai A-share which get the standard unqualified audit opinion between2008-2010for the primary sample, and get1623final samples after a certain screening, then we multiple regression analysis the1623samples. After the basic assumptions and empirical models were tested, we arrive at the conclusion of this article:During short audit term (1-4years)and long audit term (8years), audit quality is lower than the audit term (5-7years); Meanwhile, with the extension of audit term, audit quality is rising during short audit term, audit quality is falling during long audit term; Totally, audit firm tenure and audit quality show an inverted U-shaped relationship. At last, we analyze the reasons for the phenomenon and propose relevant policies and regulatory proposals on how to improve the independence of the audit and ensure audit quality in china current system.