The Relationship between the Tenure of an Audit Firm Partner and Audit Quality: Examining the Moderating Role of Audit Firm Change

ObjectiveThe rotation and tenure of audit partners are crucial factors for large corporations, as they significantly affect the quality of financial reporting. This study is among the first to provide empirical evidence on the relationship between audit partner tenure and audit quality. The research aims to explore this relationship while examining the moderating role of switching audit firms.MethodsThe current research was conducted within the unique context of Iran, focusing on evaluating the turnover of audit firm partners. To measure this turnover effectively, the study employs the research model developed by Giper et al. (2021). By applying this model in the Iranian context, the research aims to uncover insights specific to regulations that influence audit partner rotation. This model provides a structured framework for analyzing the relationships between partner tenure, audit quality, and financial reporting outcomes. The study examined companies listed on the Tehran Stock Exchange. A total of 136 companies were selected as the sample for the period from 2013 to 2021, yielding 1,224 observations. The data was analyzed using the panel data method.ResultsAfter testing the hypotheses, the results showed that rotating audit partners led to an increase in the disclosure of internal control weaknesses. In contrast, longer audit partner tenure was associated with a decrease in financial statement restatements and the disclosure of internal control weaknesses. ConclusionThe current research contributes to the existing literature on audit firm partner turnover and its relationship with audit quality indicators in companies. It sought to provide valuable evidence regarding the implications of audit firm partner turnover and tenure, shedding light on how these factors influence financial reporting standards. Based on the theoretical foundations, the research findings indicate that when audit partners at a firm change frequently, there may be signals to investors that the company wishes to manipulate its financial reports. This could be due to the new auditor's lack of familiarity with the company. Additionally, the research findings suggest that as the turnover of audit firm partners increases, there may be a higher likelihood of disclosing internal control weaknesses, which can be seen as a measure of audit quality. Conversely, when a partner has been with an audit firm for a longer period, there may be fewer financial restatements and internal control weaknesses, indicating higher audit quality. However, when both the partner's tenure and the firm's change cycle increase at the same time, there may not be a significant change in accruals, financial restatements, and disclosure of internal control weaknesses as measures of audit quality. This issue may stem from the fact that many auditing institutions in Iran tend to rely heavily on the previous year's worksheets and documentation prepared by prior auditors when conducting their audits. The practice is often used for audit planning, budgeting, and gathering necessary information for the current year's audit.