TY - JOUR
T1 - Auditor client specific knowledge and internal control weakness
T2 - Some evidence on the role of auditor tenure and geographic distance
AU - Chen, Yangyang
AU - Gul, Ferdinand A.
AU - Truong, Cameron
AU - Veeraraghavan, Madhu
PY - 2016/8/1
Y1 - 2016/8/1
N2 - 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.
AB - 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.
KW - Auditor tenure
KW - Auditor-client geographic distance
KW - Client specific knowledge
KW - Internal control weakness
UR - http://www.scopus.com/inward/record.url?scp=84975063161&partnerID=8YFLogxK
U2 - 10.1016/j.jcae.2016.03.001
DO - 10.1016/j.jcae.2016.03.001
M3 - Article
AN - SCOPUS:84975063161
VL - 12
SP - 121
EP - 140
JO - Journal of Contemporary Accounting and Economics
JF - Journal of Contemporary Accounting and Economics
SN - 1815-5669
IS - 2
ER -