An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Larry R. Davis
Michigan Tech University

Billy S Soo
Boston College

Gregory B Trompeter
Boston College

Abstract: We examine the relation between auditor tenure and a firm’s ability to use discretionary accruals to meet or beat analysts’ earnings forecasts. Regulators have long expressed concern over the use of earnings management to attain earnings targets. These concerns are compounded by questions over whether long-term auditor-client relationships impair an auditor’s ability to independently stem such practices. The profession argues that auditor rotation reduces auditors’ familiarity with the client and would adversely affect quality. We find that firms with short (three years or less) and long (15 years or more) tenure are more likely to have non-negative earnings surprises and higher levels of discretionary accruals. Further, they are more likely to report positive discretionary accruals that allow them to meet or beat earnings forecasts. These results suggest that both short and long tenure have detrimental effects on audit quality.

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