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Do audit tenure and firm size contribute to audit quality?: Empirical evidence from Jordan

Author

Listed:
  • Ali Abedalqader Al-Thuneibat
  • Ream Tawfiq Ibrahim Al Issa
  • Rana Ahmad Ata Baker

Abstract

Purpose - The purpose of this paper is to analyze the effect of the length of the audit firm-client relationship and the size of the audit firm on audit quality in Jordan. Design/methodology/approach - To test their hypotheses, the authors use the quadratic form approach, similar to Chi and Huang, with some modifications. The population of this study encompasses all firms in which stock is publicly traded on the Amman Stock Exchange throughout the years (2002-2006). Findings - Statistical analysis of data shows that, audit firm tenure affects the audit quality adversely (negatively). Audit quality deteriorates, when audit firm tenure is extended as a result of the growth in the magnitude of discretionary accruals. Meanwhile, data analysis did not reveal that the audit firm size has any significant impact on the correlation between audit firm tenure and audit quality. Practical implications - If auditor independence and audit quality are to be enhanced, the audit firm should be rotated in order to open the door for new auditors to investigate the client with greater scrutiny and due care. Moreover, the activities of big audit firms should be monitored in order to distinguish their role from small firms. Originality/value - The paper provides evidence from a developing country about audit quality. It is expected to support and sustain improvement of audit quality, and therefore, financial reporting quality. The evidence provided by this paper adds to the literature internationally and this is important because auditing is a socially constructed phenomenon.

Suggested Citation

  • Ali Abedalqader Al-Thuneibat & Ream Tawfiq Ibrahim Al Issa & Rana Ahmad Ata Baker, 2011. "Do audit tenure and firm size contribute to audit quality?: Empirical evidence from Jordan," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(4), pages 317-334, April.
  • Handle: RePEc:eme:majpps:v:26:y:2011:i:4:p:317-334
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    References listed on IDEAS

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    1. Butler, Marty & Leone, Andrew J. & Willenborg, Michael, 2004. "An empirical analysis of auditor reporting and its association with abnormal accruals," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 139-165, June.
    2. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, September.
    3. Arrunada, Benito & Paz-Ares, Candido, 1997. "Mandatory rotation of company auditors: A critical examination," International Review of Law and Economics, Elsevier, vol. 17(1), pages 31-61, March.
    4. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    5. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    6. Dechow, Patricia M. & Hutton, Amy P. & Sloan, Richard G., 1999. "An empirical assessment of the residual income valuation model1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 1-34, January.
    7. Anthony, Joseph H. & Ramesh, K., 1992. "Association between accounting performance measures and stock prices : A test of the life cycle hypothesis," Journal of Accounting and Economics, Elsevier, vol. 15(2-3), pages 203-227, August.
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    Citations

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    Cited by:

    1. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.
    2. Patrick Velte & Carl-Christian Freidank, 2015. "The link between in- and external rotation of the auditor and the quality of financial accounting and external audit," European Journal of Law and Economics, Springer, vol. 40(2), pages 225-246, October.
    3. repec:eco:journ1:2018-01-19 is not listed on IDEAS
    4. Michal Šindelář, 2016. "Rotation of auditors of companies listed on the stock market of the Prague Stock Exchange," Český finanční a účetní časopis, University of Economics, Prague, vol. 2016(3), pages 59-71.
    5. repec:eee:jiaata:v:30:y:2018:i:c:p:69-84 is not listed on IDEAS
    6. Patrick Velte, 2012. "External rotation of the auditor," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 23(1), pages 81-91, September.

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