Auditors Tenure and Financial Reporting Quality: Evidence from a Developing Country

Abstract

The purpose of this paper is to examine the relationship between audit firm tenure and financial reporting quality. Particularly, this study examines whether firms with longer audit firm tenures are more engaged in accrual-based earnings management activities in Pakistani. Current study measures auditor tenure as the number of consecutive years that the client has retained the audit firm. This study selected sample data from 280 non-financial listed firms in Pakistan Stock Exchange (PSE) during the period of 2008-2017, which comprise of 2,800 firm-year observations. The results exemplify that firms with longer audit firm tenures are more negatively associated with accrual-based earnings management activities, and showing better financial reporting quality. Moreover, the study shows that non-mandatory audit firm rotation is associated with accrual-based earnings management activities, and showing poor financial reporting quality. Apparently, the study implies that there is an adverse relationship between auditor tenure and financial reporting quality, pursuant to which the regulators must keep non-mandatory auditor rotation factor in mind during regulatory reforms. This study contributes to the field of corporate governance where it integrates auditor firm tenures with financial reporting quality. Further, this study contributes to practice where it provides deep insight to policymakers who are interested in improving corporate governance in transnational economies.