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Audit firm tenure and audit quality in a constrained market

Citation

Azizkhani, M and Daghani, R and Shailer, G, Audit firm tenure and audit quality in a constrained market, The International Journal of Accounting, 53, (3) pp. 167-182. ISSN 0020-7063 (2018) [Refereed Article]

Copyright Statement

Copyright 2018 University of Illinois

DOI: doi:10.1016/j.intacc.2018.07.002

Abstract

We examine the relation between audit quality and audit firm tenure in the Iranian audit market, which is constrained by government policies that create intense competition for clients among many small audit firms. We develop arguments that these circumstances create cost pressures that entrench low audit quality and render auditors' plans more predictable to managers wishing to misstate their accounts. Using publicly available data for the audits of listed companies in Iran prior to mandatory audit firm rotation and the incidence of misstated financial reports identified by the Iranian Association of Certified Public Accountants Inspection Office, we find that the likelihood of a misstatement is lowest in the first two years of audit firm tenure. We also find that the likelihood of misstatement is not associated with the year preceding a mandatory audit firm rotation, suggesting outgoing auditor effort is not sensitive to the prospect of subsequent revelations of deficiencies. Although our results from a pre-mandatory rotation period show that frequent rotations appear to improve the financial reporting quality in our sample, we are wary of interpreting these results as support for the mandatory audit firm rotation policy in Iran. Rather, we suggest this is a peculiar consequence of deficiencies in audit quality inherent in the Iranian market.

Item Details

Item Type:Refereed Article
Keywords:audit quality, audit firm tenure, auditor competition, misstatements
Research Division:Commerce, Management, Tourism and Services
Research Group:Accounting, Auditing and Accountability
Research Field:Accounting, Auditing and Accountability not elsewhere classified
Objective Division:Commercial Services and Tourism
Objective Group:Property, Business Support Services and Trade
Objective Field:Administration and Business Support Services
UTAS Author:Azizkhani, M (Dr Masoud Azizkhani)
ID Code:127953
Year Published:2018
Web of Science® Times Cited:1
Deposited By:TSBE
Deposited On:2018-08-24
Last Modified:2018-12-05
Downloads:0

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