Authors: Maria Kyriakou, Augustinos Dimitras

Title: Earnings Quality and Auditor Tenure during recession

Abstract

The purpose of this study is to examine the relationship between auditor tenure and earnings quality during financial crisis. There is no doubt that companies are more likely to face financial problems and to tend to earnings manipulation during recession. For this reason we study the association between earnings quality and auditor tenure in this period. The analysis is focused on German, French, Italian and Spanish companies and the period of study is 2005-2011.

The findings between auditor tenure and earning quality are mixed. On the one side, the results of the study indicate that there is a positive and statistically significant relation between auditor tenure and earnings management, suggesting lower earnings quality and lack of auditor independence. On the other side, we find that there is a negative and statistically significant relation between audit tenure and earnings management techniques, indicating both higher earnings quality and auditor independence. Additionally, we examine the association between of financially distressed companies and earnings management manipulation during recession.

The results provide evidence for both managers and investors to require mandatory auditor rotation as to enhance earnings quality and help strengthen auditor’s independence.