THE EFFECT OF ABNORMAL ACCRUAL ON FUTURE AUDIT TENURE

Abstract

Increase the auditor independence issue leads to increase the importance of audit rotation
phenomenon in accounting researches. Auditors change almost lead to decrease the
confidence of investors about reliability of financial statements, special if audit change
include negative signals, bad news and doubt about new auditors. Auditors change can be
either discretionary or mandatory. If the quality of financial reporting is not suitable, auditors
terminate the audit engagement.
Otherwise if auditor disagree with owner about current accounting principles and standards,
owner change the auditor. So, the main goal of current research is to investigate the effect of
abnormal accrual on life expectancy of audit engagements.
The population of research is all listed firms in Tehran stock exchange. Finally a sample of
100 listed firms was chosen by systematic method. Time-period of research is from 2004-
2011. Logit multiple regression was utilized to test hypotheses. Statistical methods used
consist of Hausmar-Lamshu statistic, adjusted R square and t- statistic.
Finding indicates that income-decreasing accruals decrease the life expectancy of audit
engagement. Findings also indicate that income-decreasing accruals decrease the life
expectancy of audit engagement. In other words, by increasing the level of income-increasing
accrual and income-decreasing accrual the probability of terminating the audit engagement
and dismissal the auditor increase too and lead to decreasing the future tenure.