We consider the effect of auditor tenure on the level of managerial fraud and the extent of auditor qualification of reports. We consider two conflicting effects. As auditor tenure increases, the auditor's ability to detect fraud increases, which reduces the manager's fraud-incentives, but the auditor may become more sympathetic to management, which may increase fraud incentives. In order to analyse these issues, we develop an auditing game in which the manager makes an unobservable decision whether or not to commit fraud. The auditor then decides whether to perform a basic or an extended audit. The level of audit affects the probability of fraud-detection. Following the outcome of the audit, the auditor then decides whether to issue a qualified or unqualified report. Our model provides policy implications in relation to the debate regarding mandatory turnover of auditors.
|Place of Publication||Bath|
|Publication status||Unpublished - 11 Dec 2007|