AUDITOR TENURE, AUDIT QUALITY, AND DEBT COVENANTS

10.6293/AQAFA.201912_(17).0009

Zev Fried

Auditor Tenure ； Audit Quality ； Debt Contracting ； Debt Covenants ； Mandatory Audit Rotation

Advances in Quantitative Analysis of Finance and Accounting

17期（2019 / 12 / 31）

259 - 285

英文

The decreased use of financial covenants in loan contracts in the presence of higher quality auditors is well documented in the literature. Additionally, this literature has noted the decreased use of performance (income statement based) covenants relative to capital (balance sheet based) covenants in debt contracts when higher quality auditors are present. Using auditor tenure as an auditor quality proxy, I document that these trends hold true as well for lenders that have longer-tenured auditors. These findings add to the debate regarding the impact of longer auditor tenure. In the discussion over auditor independence vs. auditor competence, the results presented are consistent with debt market participants perceiving longer audit tenure as increasing audit quality. These findings provide valuable input and information to regulators as they debate the merits of requiring mandatory audit rotation as it is evident that an essential subset of capital providers view longer auditor-client relationships as beneficial.

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