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Pre and Post-SOX Associations between Audit Firm Tenure and Earnings Management Risk
Santanu Mitra,
Wayne State University
Donald R Deis, Texas A & M University - Corpus Christi
ABSTRACT. This study investigates the relationship between auditor tenure and earnings management risk over a four year time-period surrounding the enactment of SOX. Using Beneish’s (1999) M-SCORE as a measure of earnings manipulation risk, the analysis produces evidence of a negative relationship between the length of auditor tenure and the risk of earnings management. Additional analysis reveals financial misreporting is more likely to occur in the first three years of auditor tenure in the pre-SOX period. This result is consistent with similar studies prior to SOX (e.g., Carcello and Nagy 2004, Myers et al. 2003, Johnson et al. 2002). We find that the association between the two is moderated substantially in the post-SOX years. We posit that heightened scrutiny over audits (e.g., PCAOB inspections) and the perceived threat of additional regulations to limit auditor tenure explain this finding.
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