Audit Partner Tenure and Independence in a Low Litigation Risk Setting

Abstract

We investigate whether long audit partner tenures impair auditor independence, as proxied by the opinion of the audit report, with a sample of Spanish companies for the period: 2002–2010. The Spanish audit market constitutes an ideal setting in which to address this issue, as it is characterized by unusually lengthy engagements with the audit firm. The motivation relies, on the one hand, on the current discussion about the necessity to reinforce the independence of auditors and, on the other hand, on the very limited available research at the partner level. The main result is the lack of significant effects of partner tenure on independence. This finding is robust to various checks. Unlike prior research, we also address the joint effects of firm and partner tenure on independence. Results indicate that partner tenure does not compromise independence, even under long or extremely long audit firm tenures. These findings might have some interesting policy implications, in particular for the intense current debate on auditor rotation regimes which is taking place within the European Union.

Keywords:

• audit partner tenure
• audit firm tenure
• auditor independence
• audit qualifications
• litigation risk

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Quick (2012) provides a detailed discussion of the proposals contained in the Green Paper.

2 Although they did not find a significant effect of tenure on either working capital accruals or abnormal working capital accruals, they reported that a lower proportion of clients misses breakeven for long partner tenure observations, suggesting a greater ability to manage earnings.

3 According to the authors, when the audit firm rotates, the new firm brings a new team, applies its own methodology and new client procedures, while in partner rotation, in most cases, all that changes is one audit partner.

4 For example, the average audit firm tenure is 5.7 years in Chi and Huang (2005); 3.6 years in Knechel and Vanstraelen (2007); 8.6 years in Gul, Jaggi, and Krishnan (2007); 6.9 years in Chen et al. (2008); and 6.9 years in Lim and Tan (2010).

5 For example, 64% reported by C&S for Australia or 80% reported by Chi and Huang (2005) for Taiwan.

6 To clarify this issue, we can imagine two partners auditing two different companies for the two-year period 2008–2009. However, while the first auditor had already audited the company during the whole period 2000–2005, the second auditor had not previously audited the company. Although familiarity threats associated to tenure would be expected to be rather different in both situations, the value of the variable partner tenure will be two years in both cases.