Collaborative Tenure, Audit Committee Chair Changes, and Earnings Management

In a recent concept release the Public Company Accounting Oversight Board (PCAOB) highlighted concerns regarding auditor independence and auditor objectivity. They expressed concern that auditors may have a bias to accept management’s views, particularly in long auditor tenure relations, and asked for public comments on the idea of mandatory auditor rotation. Prior research has focused primarily on the auditor side of the relation, however, my study considers the collaborative effect of the three parties involved in the financial reporting process (management (Chief Executive Officer (CEO), the auditor, and the audit committee).I find that longer collaborative tenure between the CEO and the auditor is associated with lower positive discretionary accruals (i.e., less earnings management). This finding is contrary to the PCAOB’s concerns regarding long auditor tenure and lower financial reporting quality. I do not find that the joint tenure of the three parties (CEO, auditor and audit committee chair) is significantly associated with earnings management or accrual quality. I also find that the first year of an audit committee chair change is associated with an increase in positive discretionary accruals. This association does not differ based on different lengths of auditor tenure. However, longer collaborative tenure between the auditor and the CEO constrains earnings management and there is an even greater effect when there is an audit committee chair change (i.e., there are lower positive discretionary accruals). This study provides evidence that longer auditor tenure is not necessarily an undesirable situation, either by itself and particularly not if the long tenure is coupled with long tenure of the CEO.