A Study of the relation between audit firm rotation and audit firm tenure on income quality at Tehran Stock Exchange Companies based on Kasznik model

One of the most important issues nowadays in the audit field is the audit quality. Furthermore, analysts of financial information and stock market participants consider quality of earnings as important information. Various factors affect the quality of audit including the independence of audit, firm size, reputation and tenure and change of independent auditors noted (Namazi, 1390). Also Earnings quality can be measured by accruals quality, earning persistence, earning predictability and earning smoothing (Nichols, 2002). On these issues, some accounting professionals and financial markets believe that the audit quality and earnings quality could have a meaningful relationship and be effective. So to assess the financial and accounting information by business people and investors, a review of the relationship between them is necessary.
The present study aims at examining the relationship between tenure and change auditor with earnings quality at Tehran Stock Exchange.
Hypothesis: The main goal of the study is to examine the relationship between tenure and change auditor with earnings quality at Tehran stock exchange. Thus research hypotheses are developed as follows: H1. There is a significant relationship between auditor tenure and earnings quality.
H2. There is a significant relationship auditor rotation and earnings quality.
In this research, the independent variables are auditor tenure and auditor change (as a proxy for audit quality), and dependent variable is earnings quality measured by Kasznik model (1999). According to the literature, control variables include firm size, leverage and grow rate of sales.
The data required for the research were gathered through official websites of Tehran Stock Exchange. The research method is a descriptive and correlational approach. The 83 companies listed in Tehran Stock Exchange during the period from 2004 to 2015 were examined. To test research hypotheses, we have used a multiple linear regression model and E-views software.
The first hypothesis of the study was proposed and tested to investigate the relationship between auditor tenure and earnings quality. The results showed that increasing the tenure of the auditors resulted in increasing the accrual items and thus the quality of earnings was reduced. The result of this hypothesis is consistent with the results of the study conducted by Diana (2013), Geiger (2002) and Gul(2009).
The second hypothesis of this study was the relationship between auditor rotation and earnings quality. The results showed that increasing auditor change caused decreasing accrual so earning quality increased. The results of this hypothesis are consistent with the research results of Levis (2001) and Maxwell (2004).
The research findings showed that by increasing auditors’ tenure the amount of accruals will increase and thus the earning quality will decrease. Meanwhile, by increasing the amount auditor change, accruals will decrease and the amount of earning quality will increase.