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

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

Journal article

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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 and Madhu Veeraraghavan

Journal of Contemporary Accounting and Economics, Vol.12(2), pp.121-140

2016

DOI: https://doi.org/10.1016/j.jcae.2016.03.001

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Abstract

Auditor tenure

Auditor–client geographic distance

Client specific knowledge

Internal control weakness

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 to 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.

Details

Title: Auditor client specific knowledge and internal control weakness: Some evidence on the role of auditor tenure and geographic distance
Authors: Yangyang Chen (Corresponding Author) - Hong Kong Polytechnic University
Ferdinand A. Gul (Author) - Deakin University
Cameron Truong (Author) - Monash University
Madhu Veeraraghavan (Author) - T A Pai Management Institute
Publication details: Journal of Contemporary Accounting and Economics, Vol.12(2), pp.121-140
Publisher: Elsevier Ltd
DOI: 10.1016/j.jcae.2016.03.001
ISSN: 2352-3298
Organisation Unit: School of Business and Creative Industries; University of the Sunshine Coast, Queensland
Language: English
Record Identifier: 99678895902621
Output Type: Journal article

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