Audit tenure, auditor specialization and audit report lag

Abstract

Purpose

This paper aims to examine the association between audit firm tenure and audit report lag (ARL) and the impact of auditor industry specialization on the association between audit firm tenure and ARL.

Design/Methodology/Approach

Using Habib and Bhuiyan’s (2011) method of measuring auditor industry specialization, the authors examine the sample of 7,291 firm-year observations from 2008 to 2010.

Findings

The authors find that auditor industry specialization (regardless of city-level, national-level and joint city- and national-level industry specialization) weakens the positive association between ARL and short audit firm tenure, suggesting that auditor industry specialization complements the negative effect of short audit firm tenure on ARL.

Originality/value

First, the authors add to the literature by answering the question of whether hiring industry auditor specialists is an effective way to shorten ARL created by short audit tenure. The authors provide some evidence that the concern of short audit tenure leading to longer ARL is reduced by hiring an industry-specialized auditor. Prior research mainly focuses on identifying the determinants of ARL without going further to find out which are the effective ways to reduce the audit delay. Second, their findings can somehow resolve the debate on whether audit firm rotation should be mandatory. A new auditor’s lack of knowledge of clients’ business operations during the early years of audit engagements results in longer ARL, which eventually influences the clients’ financial performance. The authors' result suggests the firms can reduce this adverse consequence by hiring an industry-specialized auditor. Finally, their findings may provide helpful information to firms in selecting external auditors, public accounting firms in selecting a differentiation strategy and regulators in mandating audit firm rotation.

Citation

Dao, M. and Pham, T. (2014), "Audit tenure, auditor specialization and audit report lag", Managerial Auditing Journal, Vol. 29 No. 6, pp. 490-512. https://doi.org/10.1108/MAJ-07-2013-0906