Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence

Abstract

SUMMARYRegulators and lawmakers in the U.S. periodically express concerns about a possible association between auditor tenure length and audit failure (SEC 1994; U.S. House of Representatives 2002). In this study, where we define audit failure as a bankrupt company not receiving a going concern modified audit opinion prior to bankruptcy (a Type II reporting error), we examine prior audit reports for a sample of 401 U.S. publicly held companies that filed for bankruptcy during the period 2002–2008. Using a quadratic model to control for potential nonlinearity in the relationship between auditor tenure and audit reporting, we find no significant association between auditor tenure and Type II errors for Big 4 audit firms. In contrast, for non-Big 4 audit firms we find evidence of a significant association that is nonlinear. Specifically, auditor tenure appears to adversely influence non-Big 4 firms' audit reporting for bankrupt clients in the initial years of an audit engagement and has no discernible effect in the later years. Thus, we provide evidence that long auditor tenure, of itself, is not associated with Type II reporting errors. In this respect, our findings may help to inform the continuing debate regarding the possible adverse effects of long auditor tenure. Overall, our results are robust to controlling for any extant endogeneity with respect to going concern opinions and choice of the length of audit firm tenure.