Tan, 2008) on financial reporting quality. There are two main competing opinions in
relation to the impact of audit tenure on audit quality. First, some researchers posit
that long audit tenure is related to high audit quality through the auditors’
enhanced ability to detect misstatements and errors because of the greater
understanding of the client’s business and processes (Johnson et al., 2002; Manry
et al., 2008). It is argued that longer audit tenure and the provision of non-audit
services would increase audit quality because of the increased knowledge of specific
audit clients that is negatively related to the likelihood of financial restatements.
While, others assert that long tenure could reduce audit quality for the reasons of
complacency or less rigorous audit procedures that reduce auditors’ capacity to
detect errors and misstatements (Shockley, 1982; Deis and Giroux, 1992). Some
researchers argue that longer audit tenure and high provision of non-audit services
would impair auditor independence and, consequently, reduce the propensity of the
auditors to issue an accurate audit opinion.
Ghosh and Moon (2005) employed a market-based approach and evaluated the
impact of auditor tenure on perceptions of financial statement users concerning the
quality of earnings. Specifically, they investigated the perceptions of investors,
independent rating agencies, and financial analysts on the impact of auditor tenure
on earnings response coefficients from returns-earnings regressions (as a proxy for
earnings quality). They found that the investors and financial analysts perceived
that longer audit tenure could enhance audit quality. In contrast, the independent
rating agencies perceived the unfavourable impact of auditor tenure on earnings
In general, prior research has documented mixed results on the relationship
between audit tenure and audit quality. Again, the evidence of the linkage between
the surrogates of audit quality and financial reporting quality provides inconsistent
Academic researchers have also investigated audit quality from the analysis of audit
failure cases. It is expected that higher audit quality is reflected through less
litigation as a consequence of audit failures through auditors’ ability to detect and
report material misstatements. For example, Palmrose (1988) examined 472
sample of legal cases related to audit-related litigation against Big Eight and nonBig
Eight firms in the US from 1960 through 1985. She found that big size audit
firms were associated with less incidence of litigation than other types of audit firm.
There are also some studies that employ a case study observation to examine the
content of an individual case of a company or audit firm in detail (Erickson et al.,
2000; Fuerman, 2004). For example, Erickson et al. (2000) examined detailed legal
documents (audit working papers and auditor deposition testimony of auditors) of
audit failure of Lincoln Savings and Loan (LSL) in the US. They concluded that lack
of knowledge and understanding of auditors in LSL’s business and operations
contributed to a deficiency in audit procedures, and, consequently, led to audit

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