The purpose of this study is to examine the relation between audit tenure and audit quality. The audit quality has been evaluated by the magnitude of absolute discretionary accruals based on cross-sectional version of modified Jones model.
Multivariate results, controlling for auditor type, age, growth, size, leverage, change of cash flow from operation, cash flow from investment and cash flow from financing, generally suggest audit quality has a positive relation with audit tenure, which is consistent with Ghosh and Moon(2002) and Myers et al(2003). Test of nonlinearity in the audit quality shows that there is no significant negative relation between audit quality and tenure above 7 years. Like Mansi et al(2003), audit quality decreases as the length of tenure increases for the investment grade firms. While quality increases as the length of tenure increases for the noninvestment grade firms. I find that the use of a Big6 auditor in general does not affect the audit quality.
In sum, the results are consistent with the hypothesis that audit quality improves with auditor tenure, which suggests that recent mandatory auditor rotation policy might harm the capital markets.
