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Auditor client specific knowledge and internal control weakness: some evidence on the role of auditor tenure and geographic distance

Chen, Yangyang, Gul, Ferdinand A., Truong, Cameron and Veeraraghavan, Madhu 2016, Auditor client specific knowledge and internal control weakness: some evidence on the role of auditor tenure and geographic distance, Journal of contemporary accounting and economics, vol. 12, no. 2, pp. 121-140, doi: 10.1016/j.jcae.2016.03.001.

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Title Auditor client specific knowledge and internal control weakness: some evidence on the role of auditor tenure and geographic distance
Author(s) Chen, Yangyang
Gul, Ferdinand A.
Truong, Cameron
Veeraraghavan, Madhu
Journal name Journal of contemporary accounting and economics
Volume number 12
Issue number 2
Start page 121
End page 140
Total pages 20
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2016-08
ISSN 1815-5669
2352-3298
Keyword(s) internal control weakness
client specific knowledge
auditor tenure
auditor–client geographic distance
Summary In this paper we draw on the audit quality and cluster theory literature to examine whether auditor tenure and auditor's geographic proximity to the client (proxies for auditor client specific knowledge) are associated with the incidence of Section 404 internal control weakness (ICW) under the Sarbanes-Oxley Act (2002). Using a large sample of 24,217 firm-year observations for the period 2004-2012, we show that firms with long auditor tenure and in closer geographic proximity to auditors have lower incidence of ICW. Furthermore, we find that the positive association between auditor-client geographic distance and ICW is weaker for firms with longer auditor tenure. Our results suggest that auditor rotation policies could deprive the auditor of client specific knowledge, especially for auditors located further away from their clients. Our results are robust to propensity score matching method and endogenous effects.
Language eng
DOI 10.1016/j.jcae.2016.03.001
Field of Research 150199 Accounting, Auditing and Accountability not elsewhere classified
1501 Accounting, Auditing And Accountability
1402 Applied Economics
1502 Banking, Finance And Investment
Socio Economic Objective 970115 Expanding Knowledge in Commerce
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2016, Elsevier
Persistent URL http://hdl.handle.net/10536/DRO/DU:30084576

Document type: Journal Article
Collection: Department of Accounting
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