Auditor Tenure and Financial Reporting Fraud: Pre and Post Sarbanes-Oxley Act of 2002

Abstract

We use a comprehensive and unique fraud database from the Institute for Fraud Prevention (IFP) to test the relationship between audit firm tenure and fraudulent financial reporting pre and post Sarbanes Oxley Act of 2002 (SOX 2002). Overall, short tenure is only marginally related to the likelihood of fraud. Also, only tenure of nine years or more is positively associated with the likelihood of fraud. We also find that compared with other audit firms, the Big-N are less likely to be associated with fraud, while client size is marginally positively associated with fraud, possibly reflecting larger clients’ bargaining power with auditors in contentious audit situations (c.f., Nelson et al. 2002). The results hold for the pre-SOX period but not for the post SOX period.