Auditor client specific knowledge and internal control weakness: Some evidence on the role of auditor tenure and geographic distance

Yangyang Chen; Ferdinand A. Gul; Cameron Truong; Madhu Veeraraghavan

doi:10.1016/j.jcae.2016.03.001

Auditor client specific knowledge and internal control weakness: Some evidence on the role of auditor tenure and geographic distance

Yangyang Chen, Ferdinand A. Gul, Cameron Truong, Madhu Veeraraghavan

Banking & Finance

Research output: Contribution to journal › Article › Research › peer-review

Abstract

In this paper we draw on the audit quality and cluster theory literature to examine whether auditor tenure and auditor's geographic proximity to the client (proxies for auditor client specific knowledge) are associated with the incidence of Section 404 internal control weakness (ICW) under the Sarbanes-Oxley Act (2002). Using a large sample of 24,217 firm-year observations for the period 2004-2012, we show that firms with long auditor tenure and in closer geographic proximity to auditors have lower incidence of ICW. Furthermore, we find that the positive association between auditor-client geographic distance and ICW is weaker for firms with longer auditor tenure. Our results suggest that auditor rotation policies could deprive the auditor of client specific knowledge, especially for auditors located further away from their clients. Our results are robust to propensity score matching method and endogenous effects.

Original language	English
Pages (from-to)	121-140
Number of pages	20
Journal	Journal of Contemporary Accounting and Economics
Volume	12
Issue number	2
DOIs	https://doi.org/10.1016/j.jcae.2016.03.001
Publication status	Published - 1 Aug 2016

Keywords

Auditor tenure
Auditor-client geographic distance
Client specific knowledge
Internal control weakness

Cite this

Chen, Y., Gul, F. A., Truong, C., & Veeraraghavan, M. (2016). Auditor client specific knowledge and internal control weakness: Some evidence on the role of auditor tenure and geographic distance. Journal of Contemporary Accounting and Economics, 12(2), 121-140. https://doi.org/10.1016/j.jcae.2016.03.001

Chen, Yangyang ; Gul, Ferdinand A. ; Truong, Cameron ; Veeraraghavan, Madhu. / Auditor client specific knowledge and internal control weakness : Some evidence on the role of auditor tenure and geographic distance. In: Journal of Contemporary Accounting and Economics. 2016 ; Vol. 12, No. 2. pp. 121-140.

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Chen, Y, Gul, FA, Truong, C & Veeraraghavan, M 2016, 'Auditor client specific knowledge and internal control weakness: Some evidence on the role of auditor tenure and geographic distance' Journal of Contemporary Accounting and Economics, vol. 12, no. 2, pp. 121-140. https://doi.org/10.1016/j.jcae.2016.03.001

Auditor client specific knowledge and internal control weakness : Some evidence on the role of auditor tenure and geographic distance. / Chen, Yangyang; Gul, Ferdinand A.; Truong, Cameron; Veeraraghavan, Madhu.

In: Journal of Contemporary Accounting and Economics, Vol. 12, No. 2, 01.08.2016, p. 121-140.

Research output: Contribution to journal › Article › Research › peer-review

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