LEAD AUDIT PARTNERS� LONG-TERM CLIENT ASSOCIATIONS: IMPEDIMENTS TO THE APPEARANCE OF INDEPENDENCE?

Abstract

ABSTRACT In an attempt to strengthen auditor independence, the SEC imposed in 2003 the current mandate requiring lead and concurring audit partners to rotate off an audit engagement after serving a five year tenure. Since then, critics have questioned the necessity of this mandate, noting its deleterious consequences to smaller accounting firms. While the SEC’s requirement has focused primarily on ensuring a partner’s objective mental attitude during the audit process, his/her appearance of independence to financial statement users represents another significant consideration in the assessment of the mandate. Recognizing the importance of this latter factor, the current study examines in an experimental setting the impact of client tenure on nonprofessional investors’ evaluation of a lead partner’s independence. The study finds that investors do not generally perceive long-term client associations as impediments to a partner’s level of objectivity. Given the significance of financial statement users’ impressions to the ultimate value of the external audit, this result suggests that arguments justifying the SEC’s lead audit partner tenure restriction may merit further evaluation. Keywords Audit Tenure, Auditor Rotation, Auditor Independence, Nonprofessional Investors.