The Relationship Between Audit Tenure and Audit Quality - Evidence from Sierra Leone

Dissertation Proposal

Topic: The Relationship between Audit Tenure and Audit Quality-

Evidence from Sierra Leone.

Kadiatu Keturah Sillah

 Institute of Public administration and Management

Introduction

This dissertation proposal will investigate the relationship between audit tenure and audit quality in Sierra Leone.

1.1 Background of the Study

The trend of auditing failure cases has attracted wide attention from the public over the years in both developing and developed countries. Several people have started to notice that behind these failures, the auditors of most companies have not changed for a long time. A long audit tenure is therefore suspected by stakeholders, and so is the audit quality. To improve audit quality, some developed countries introduced a mandatory rotation policy, which was first adopted in the United States in 2002. This policy requires that the audit partner should be rotated at least once every five years.  

However, such measures have not gone unchallenged as several researchers have been sceptical as to whether it is necessary to rotate auditors. For instance, Gosh and Moon (2003) and Myers et al. (2003) amongst many other researchers examined the relationship between audit tenure and audit quality before the implementation of rotation policy in previous literature. Their findings suggest that audit quality improves with a long audit partner tenure and, therefore, their evidence does not support the partner rotation policy. In contrast, the opposite conclusion to this idea is proposed by Myers et al. (2005), and Chi and Huang (2005).

Meanwhile, some researchers investigate the relationship between audit firm tenure and audit quality rather than partner tenure. Johnson et al. (2002) suggest a positive association between firm tenure and audit quality while Luo and Huang (2007) found a negative relationship in their studies.

The majority of these previous studies investigate the relation between audit tenure and audit quality using samples before the implementation of the rotation policy. Like in other countries, auditing has also been a usual practice in Sierra Leone for several years. However, little is being known about the relationship between audit tenure and audit quality in the case of Sierra Leone.

This study will seek to close the gap by investigating the relationship between audit tenure and audit quality in Sierra Leone. Different from the previous studies which use either partner tenure or firm tenure to substitute audit tenure, this study will examine the relationships between audit quality and partner tenure, firm tenure separately.

1.2 Statement of the Problem

The audit quality issue has been a hot topic for stakeholders for a long time and Sierra Leone is no exception. In Sierra Leone, some auditing firms have been in existence for very long time and they have had a reasonable number of organisations they have rendered auditing service to. On the other hand, most of these organisations have maintained the same auditing firm for several years. However, little is being known about the relationship between audit tenure and audit quality in the case of Sierra Leone. This study will therefore seek to make a contribution in providing a comprehensive and detail understanding on the relationship between audit tenure and audit quality with special reference to Sierra Leone. It will contribute to the already existing studies on the relationship between audit tenure and audit quality.

1.3 The Purpose of the Study

The purpose of this study will be to investigate the relationship between audit tenure and audit quality in Sierra Leone. In this context the study will seek to explore the under mentioned research questions.

1.4 Research Questions

Many researchers have examined the relationship between audit partner tenure and audit quality before the implementation of a rotation policy in the previous literature. For example, Shokley (1981), Gosh and Moon (2003) and Myers et al. (2003) suggest that audit quality improves with long-audit partner tenure, and, therefore their evidence does not support the partner rotation policy, while Myers et al. (2005) argue that audit tenure has a negative impact on audit quality. Besides, another group of researchers examines the relationship between audit firm tenure and audit quality. For example, Johnson et al. (2002) suggest a positive association between firm tenure and audit quality, while Luo and Huang (2007) find a negative relation in their studies. As the majority of these prior studies investigate the relationship between audit tenure and audit quality using samples before the implementation of rotation policy, the question here using the case of Sierra Leone are:

1. Does audit tenure affect audit quality in Sierra Leone?
2. Does it necessary to rotate audit firms in Sierra Leone?

Motivated by these questions, this study will investigate the relationship between audit tenure and audit quality (using selected companies and firms) in Sierra Leone.  

1.5 Research Hypothesis

Whether and how audit tenure affects audit quality has been discussed over decades. Some people think that the longer audit tenure help the auditors to be more knowledgeable about their clients and perform better and more effectively than new auditors. The contrary opinion is that the long auditor-client relationship will harm the auditors’ independence, as they are very familiar with each other (Chen et al, 2008). Additionally, familiar auditors are more likely to compromise in order to retain the client. The mandatory rotation policy’s implementation indicates that the regulators regard the longer audit tenure as being harmful to the audit quality. However, the discussions have not come to an end with the rotation policies. A lot of researchers use the data before the implementation of rotation policy to see whether this policy is worthy; while another group compares the audit quality before and after the year of implementation to check whether audit quality has improved. In this respect, the study will therefore test the following hypotheses:

Hypothesis 1: Audit quality does not change with the increasing audit partner tenure

Hypothesis 2: Audit quality does not change with the increasing audit firm tenure

1.6 Significance of the Study

A study of this nature is significant given the importance of audit tenure and audit quality in low income country like ours. It is therefore necessary to carry out a comprehensive study which will seek to create better understanding of the relationship between audit tenure and audit quality in Sierra Leone. In addition, result and findings generated from this study will provide a framework in formulating policy recommendations geared towards improving how audit tenure affects audit quality in the case of Sierra Leone.

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