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    Auditor Tenure and Going Concern Opinions for Bankrupt...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions 
    Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence
    Practical Implications:

    This study should be of particular interest because the findings represent evidence concerning the relationship between auditor tenure and audit failures. The tenure effect, which is pronounced in the early years, is particularly important to the non-Big 4 sample because approximately 75 percent of non-Big 4 clients in the author’s sample have auditor tenures of four years or less. This short tenure, coupled with association between tenure and Type II errors suggest the adverse impact of short tenure is concentrated in the non-Big 4 sample. With this in mind, the findings of this paper may help to inform the continuing debate regarding the possible adverse effects of long auditor tenure. 


    Read, W.J., and A. Yezegel. 2016. Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence. Auditing: A Journal of Practice and Theory 35 (1): 163-179.

    going concern opinions, Type II errors, and auditor tenure
    Purpose of the Study:

    Regulators and lawmakers in the U.S. periodically express concerns about a possible association between auditor tenure length and audit failure. The authors define audit failure as a bankrupt company not receiving a going concern modified audit opinion prior to bankruptcy, a Type II reporting error.  Geiger and Raghunandan began investigating this relationship in the early 2000’s; however, the authors of this study hope to extend this investigation in the three following ways:

    • Studies have shown that audit reporting companies in financial distress changed following the enactment of the Sarbanes-Oxley Act of 2002 and related legislature and media scrutiny of the auditing profession; ergo, a closer examination of more recent data would be a worthwhile measure.
    • The previous study did not examine differences between Big 4 and non-Big 4 audit firms, and studies show that there are significant differences between Big 4 and non-Big 4 auditors, including going concern decisions.
    • The previous study assumed and tested for a linear relationship between auditor tenure and audit reporting failures; however, more recent data leads the authors to allow the association between auditor tenure and audit quality to be nonlinear. 
    Design/Method/ Approach:

    The authors examine prior audit reports for a sample of 401 U.S. publicly held companies that filed for bankruptcy during the period 2002-2008. A quadratic model was used to control for potential nonlinearity in the relationship between audit tenure and audit reporting.

    • The authors did not find evidence of a significant relation between auditor tenure and going concern opinions issued by Big 4 firms to their subsequently bankrupt clients.
    • The authors did find evidence indicating a higher likelihood of Type II errors for non-Big 4 auditors in the early years of an audit; however, this relation weakens and after approximately year four of the engagement, the authors begin to observe no statistical association between tenure length and Type II errors for non-Big 4 auditors, either.
    • The authors’ results from the endogeneity analysis are consistent with their primary conclusions that non-Big 4 audit firms are more likely to make Type II reporting errors compared to Big 4 firms during the initial years of an audit engagement.
    • The authors find that long auditor tenure, of itself, is not associated with Type II reporting errors. 
    Auditor Judgment
    Going Concern Decisions