al-thuneibat et al - 2011 - do audit tenure and firm size contribute to audit quality - empirical evidence from jordan [at]

Do audit tenure and firm size
contribute to audit quality?
Empirical evidence from Jordan
Ali Abedalqader Al-Thuneibat
Department of Accounting, Faculty of Business,
University of Jordan, Amman, Jordan
Ream Tawfiq Ibrahim Al Issa
Secured Services Systems, Amman, Jordan, and
Rana Ahmad Ata Baker
Telecommunication Regulatory Commission, Amman, Jordan
Abstract
Purpose – The purpose of this paper is to analyze the effect of the length of the audit firm-client
relationship and the size of the audit firm on audit quality in Jordan.
Design/methodology/approach – To test their hypotheses, the authors use the quadratic form
approach, similar to Chi and Huang, with some modifications. The population of this study
encompasses all firms in which stock is publicly traded on the Amman Stock Exchange throughout
the years (2002-2006).
Findings – Statistical analysis of data shows that, audit firm tenure affects the audit quality adversely
(negatively). Audit quality deteriorates, when audit firm tenure is extended as a result of the growth in
the magnitude of discretionary accruals. Meanwhile, data analysis did not reveal that the audit firm size
has any significant impact on the correlation between audit firm tenure and audit quality.
Practical implications – If auditor independence and audit quality are to be enhanced, the audit
firm should be rotated in order to open the door for new auditors to investigate the client with greater
scrutiny and due care. Moreover, the activities of big audit firms should be monitored in order to
distinguish their role from small firms.
Originality/value – The paper provides evidence from a developing country about audit quality.
It is expected to support and sustain improvement of audit quality, and therefore, financial reporting
quality. The evidence provided by this paper adds to the literature internationally and this is
important because auditing is a socially constructed phenomenon.
Keywords Jordan, Auditors, Auditing standards, Developing countries, Financial reporting, Expenses
Paper type Research paper

Introduction
Management is responsible for reporting the results of the firm’s operations and financial
position to stakeholders through financial statements. A possible conflict of interest
between management and external users of financial statements exists. This conflict,
in addition to the asymmetry of the information provided, creates together an inevitable
need for auditing the financial statements by a third competent and independent party.
Auditing financial statements is intended to reduce the information risk and improve the
decision making (Arens et al., 2008). The audit process is designed to determine whether
the figures reported in financial statements present the firm’s operating results and
true financial position in a fair manner. Therefore, improving the audit quality would
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0268-6902.htm
Audit tenure
and firm size
317
Received 14 August 2009
Revised 12 June 2010
Accepted 11 October 2010
Managerial Auditing Journal
Vol. 26 No. 4, 2011
pp. 317-334
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686901111124648
provide reasonable assurance about the accuracy of reported accruals and as a
result, attest for earnings of higher quality. On the other hand, a poor-quality audit
would impair the quality of earnings and discretionary accruals (DAs) (Chih-Ying et al.,
2008).
Among the main targets, a quality audit seeks to accomplish is improving the quality
of management’s financial reporting task (Dopuch and Simunic, 1982; Watts and

Zimmerman, 1986). Improving the quality of financial statements adds value to those
reports as an investor tool for estimating the value of traded securities. Improved
quality is a function of not only the auditor’s detection of material misstatements, but
also the auditor’s behavior towards this detection. Therefore, if the auditor rectifies the
discovered material misstatements, a higher audit quality results, while failure to
correct material misstatements upon detection and prior to issuing a clean audit report
(or moreover failure to uncover material misstatements) obstructs the improvement
of audit quality (Johnson et al., 2002). In Jordan, it is widely observed that most firms
retain the same audit firm for long periods of engagement with a general tendency to
have confidence more in the quality of big firms’ audits. While long auditor-client
engagements can have adverse effects on audit quality, the size of the audit firm is
presumed to contribute to the quality of financial statements reported by its clients.
Long auditor-client relationships have the potential to create closeness between the
auditor and the client, enough to deter the auditor’s independence and reduce the
audit quality.
Investigating the quality of audits conducted by big auditors in Jordan, as reflected by
their clients’ DAs, and studying the effect of the length of the auditor-client engagement,
would determine if big auditors deliver improved audit quality when compared with
non-big auditors, and would prove whether the length of the auditor-client relationship
affects audit quality. Therefore, the question arises of whether a long audit firm-client
relationship and the size of the audit firm have any effect on audit quality in Jordan.
This study will examine the relationship between audit firm tenure (the length of
the audit firm-client relationship) and audit quality for industry and service firms listed
on the Amman Stock Exchange (ASE) in Jordan during the period 2002-2006 and the
effect of the audit firm size on this relationship. The effect will be studied in terms of
the quality of DAs reported by audit firms’ respective clients. DAs are widely used
in the literature as a proxy for audit quality. Amongst the parties which will benefit
from the findings of this study are the bodies in charge of regulating the profession.
Solid evidence would prove the effectiveness, and therefore establish the necessity for a
mandatory audit firm rotation, or such an association may be impossible to draw. In the

latter case, activating an obligatory audit firm rotation would be an additional cost for
both audit firms and their respective clients.
The Jordanian market aims to benefit from global expertise, which is apparent in the
tendency to employ big audit firms for the audit of financial statements. T herefore,
it is important to uncover whether big firm auditors deliver superior quality audits;
otherwise, the door should be opened for new comers in the Jordanian audit community
and industry, without the concern of competing with big auditors on the basis of their
superior audit quality. Additionally, it is very important to enrich the existing literature
about audit rotation, firm size and audit quality at the international level because
auditing is a socially constructed phenomenon and therefore we need evidence from
various environments.
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Literature review and hypotheses development
The accumulated literature builds on the notion that the basic objective of the audit
process is to enhance the quality of the financial reporting process by providing
improved quality audits (Dopuch and Simunic, 1982; Watts and Zimmerman, 1986).
Audit quality is commonly defined as “the market-assessed joint probability that an
auditor will both detect and report material misstatements” (DeAngelo, 1981a). It is a
function of auditors’ competence that enables them to detect material misstatements,
and auditors’ independence, that determines whether they will report those material
misstatements or not (Azizkhani et al., 2007).
Several factors determine the auditor’s ability to detect material misstatements in
financial statements, one of which is the qualifications of the auditor. An auditor’s
qualifications are an initial indicator of his/her knowledge and capabilities in the audit
field. This knowledge might be either client-specific knowledge (e.g. the knowledge of
the client’s accounting system, assets and internal controls), or a knowledge that is more
general in scope but very essential to the audit process at hand (knowledge about the
industry within which the client is operating and the accounting principles applicable in

the country where the client is operating its business). Client-specific knowledge is
the vital element that creates, and subsequently enhances, the learning curve of new
auditors (Knapp, 1991). This argument might seem simple at the outset, while in fact it is
not. Lower client-specific knowledge during the early years of an audit engagement
can result in a lower likelihood of detecting material misstatements. Such knowledge
is the auditor’s comparative advantage in detecting errors over time, when the client’s
business is understood more profoundly (Beck and Solomon, 1988). Chi and Huang’s
(2004) empirical findings support the learning effect presumption, where the ability to
investigate accounting irregularities is found to be a function of the audit tenure, whether
on the audit firm or the auditor level. Boone et al. (2008) argue that client-specific
knowledge is crucial to building a reasonably sufficient level of familiarity with the
client’s accounting system, internal controls, assets, operations and the industry within
which those operations occur as well.
In an investigation carried out by American Institute of Certified Public Accountants
(AICPA, 1992), the AICPA Quality Control Committee found the audit failures to be three
times more likely in the first two years of an engagement than in subsequent years. The
investigation surveyed 406 audit failure cases alleged by SEC clients. Two studies that
examined lawsuits involving auditors (St Pierre and Anderson, 1984; Stice, 1991) found
the audit failures to be more common in a three-year or less auditor-client engagement.
Long-tenure auditors were found more likely, in comparison with short-tenure auditors;
to issue going-conc ern opinions for clients who subsequently declared bankruptcy
(Geiger and Raghunandan, 2002).
Absolute DAs were found to decrease significantly through the passage of
the audit firm tenure (Chih-Ying et al., 2008). The researchers’ findings are consistent
with the argument that audit firm rotation might have adverse effects on the quality
of earnings; and accordingly , the accruals reported. To determine the effect of the
“Mandatory Auditor Retention Law” in Korea, Bae et al. (2007) studied DAs as a proxy
for audit quality. The researchers found DAs to be significantly lower during the years
of retaining the same auditor. Their evidence applies to both positive and negative
accruals, with stronger emphasis on negative. They considered this an indicator of

firms’ adoption of conservative accounting. On the other hand, some studies failed
Audit tenure
and firm size
319
to establish evidence on the audit firm rotation effectiveness in providing the alleged
shield from fraudulent financial reporting (Ca rcello and Nagy, 2004).
After a specific number of years, excessive familiarity can result and serve as a
deterrent to the quality of financial reports. Long tenure is assumed to lead to less
objectivity in the auditor’s behavior, where a “learned confidence” in the client is
developed (Hoyle, 1978; Arrunada and Paz-Ares, 1997). According to Johnson et al. (2002)
the learning effect will diminish when the engagement exceeds eight years. They studied
the auditor tenure divided into three categories: Short (2-3), Medium (4-8) and Long
(9 or more). Upon approaching the medium tenure category and extending beyond
towards the long tenure, the independence of the auditor is jeopardized as a result of the
auditor’s excessive familiarity with the client and its industry. The auditor is no longer
motivated to innovate or diversify in the audit procedures at this stage of the engagement.
Myers et al. (2003) provided evidence that earnings management is less of a concern
for auditors in longer audit firm tenures. Similarly, Davis et al. (2003) inferred that
management gains additional reporting flexibility with the progress in auditor tenure.
This was evident in the direct positive effect the auditor tenure had on DAs, i.e. DAs
increase with the progress in the auditor tenure. A reasonable conclusion to draw at this
stage of the argument is that it remains unclear – how long is long enough to acquire an
acceptable and reasonable level knowledge and gain the nec essary acquaintance with
the client’s business, industry and accounting system in Jordan?
The lack of consensus on the optimal length of the audit firm-client relationship
that yields better DAs’ quality constitutes the grounds for formulating the following
hypothesis:
H1. The length of the audit firm-client relationship affects audit quality as
measured by DAs.
The literature provides some evidence on the difference in learning between audit firms

relevant to their size. Chi and Huang (2004) were able to substantiate their hypothesis on
the learning differentiation across Big5 and Non-Big5. Data analysis revealed that Big5
auditors construct learning experience more quickly than Non-Big5 auditors. Big5 auditors
were significantly more proficient during the initial period of an audit engagement due to
their quickness and greater expertise in acquiring the requisite knowledge and obtaining
the necessary acquaintance. However, their results demonstrated a diminishing variation
of audit quality between Big5 auditors and Non-Big5 auditors throughout the passage of
time. They attributed the leading role of the Big5 auditors to their auditing expertise in a
new client and not to pure Big5 brand name effect.
A study of the Malaysian market found the retention of a specific audit firm to be a
function of the client’s size (measured by the total assets or the financia l risk level) and
the size of the audit firm. A small distressed company, whose financial statements
are audited by a small audit firm, was found to have a higher probability of switching
the audit firm compared to a non-distressed big client whose financial statements are
audited by a big audit firm. In addition, the tenure before switching from a small to a
big audit firm was significantly shorter than the tenure before switching from a small
to another small audit firm (Abu Thair, 2006).
The literature shows the big audit firms to be associate d with superior financial
reporting quality (Teoh and Wong, 1993). Researchers have suggested that the heavy
spending of big audit firms on auditor training, besides their size and large portfolio
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of clients, create a distinctive advantage, whether as an actual competence of the auditor
or as a perceived independence by their clients. Palmrose (1988) suggested that Big6 are
quality-differentiated suppliers, which lead to lower incidence of fraud in their case.
Fraud was also identified to be less likely in the case of Big6 auditors by other
researchers (Carcello and Nagy, 2004).
While Becker et al. (1998) recorded lower amounts of DAs in the case of Big5 auditors’
clients, Chih-Ying et al. (2008) noticed an association between Big5 auditors’ clients and

the lower DAs they report when the accruals are negative. Francis (1999) also found
firms who have a higher inclination to generate accruals, tend more towards hiring Big6
auditors. They believed the selection of Big6 auditors to be consistent with the enhanced
credibility of their clients’ earnings. Some researchers believe large audit firms have the
capacity to generate quality audits due to their greater monitoring ability (Watts and
Zimmerman, 1986). Other s believe the enhanced audit quality big audit firms deliver is a
product of their brand-name quality differentiated audits (Simunic and Stein, 1987).
In Australia, investors and analysts perceive Big4 audit firms as providers of higher
quality (Azizkhani et al., 2007).
Several studies that dealt with US cases have enriched the literature with remarkable
evidence on the improved credibility of financial reports resulting from Big4 audits
(Dopuch an d Simunic, 1982; Teoh and Wong, 1993; Khurana and Raman, 2004;
Mansi et al., 2004; Pittman and Fortin, 2004). We further pinpoint that, Dopuch and
Simunic (1982) correlated this to the greater observable quality characteristics Big4
possess; such as quality control and specialized training. DeAngelo (1981b) believed
large audit firms have more brand capital to lose and, therefore, would be more
independent and able to supply the client with better audit quality. Their large portfolio
of clients as well affords them a specific ability to resist or withstand clients’ pressure.
Earlier discussion lays the foundation for raising the question of how confident can
we be that the well-known and recognized position of Big4 auditors is due to auditing
expertise and not an outcome of their brand name effect in Jordan? To find the answer
to this question, this study examines the effect of Big4 audit firms on the quality of
DAs in the Jordanian market. Better quality DAs reported by Big4 clients would
provide evidence that Big4 have superior auditing expertise and their position is not
due to pure brand name effect:
H2. The size of the audit firm enhances the effect of the audit firm-client
relationship length on audit quality, as measured by DAs.
Study design and methodology
The population of this study consists of all Jordanian companies listed for trading on
the ASE, both in the industry and service sectors during the years 2002-2006. The

Financial sector (comprised of banks, insurance companies and financial services
companies) is excluded for two reasons:
(1) Entities in this sector have different operating characteristics (Carcello and
Nagy, 2004), and as a result, possess risk and complexity properties that are
unique in nature and different from those of other sectors.
(2) The unique characteristics of those entities make it impossible to compute the
control variable “Levera ge: debt-to-asset ratio”, or makes computing the
variable of no meaning (as it will not provide much value) (Boone et al., 2008).
Audit tenure
and firm size
321
Firms which do not comply with the sample criteria are deducted from the sample
because of the potential noise and contaminating effect they might pose on the findings.
The following are the sample criteria and requirements:
.
The firm’s shares should be listed for trading on the ASE during the years
(2002-2006).
.
The firm’s financial statements must be available for the years (2002-2006), to
provide for the financial data needed to calculate the study variables.
.
The firm’s auditor and tenure should be determined from its guide.
.
The firm should not have undergone an extraordinary event, such as merger or
acquisition, or other similar transactions that might result in reorganization of
the firm’s business segments and as a consequence affect the entity and its
financial statements.
.
The daily closing prices of each firm’s shares should be available for not less than
180 days/year. This is necessary to calculate the firm’s market value of equity.

The above-mentioned criteria of the population and sample should be considered as a
limitation of the study, that is, as a result of these criteria a limited number of firms will be
relevant for the analysis. To examine audit quality, two audit firm factors deemed to
affect this quality as discussed throughout literature review will be investigated:
the length of the audit firm-client relationship (audit firm tenure) and the size of the
audit firm.
Consistent with Johnson et al. (2002), we measure audit firm tenure as the number
of consecutive years the audit firm has audited the client’s financial statements.
Meanwhile, we further count tenure years backward starting from 2006, and trace it
until the year during which the client switched to another audit firm (Boone et al., 2008).
This provides sufficient data since we use the Chi and Huang’s (2004) model.
To determine the size of an audit firm, the market capitalization of all firms listed for
trading on the ASE was calculated. All sectors were covered and all auditors auditing
firms listed for trading on the ASE during the period (2002-2006) were included as well.
Market values of ASE firms were traced to their corresponding auditors. The mean of
the market value of each auditor’s client was calculated and used as a proxy for the
auditor’s size. Therefore, the market share of each audit firm was determined and Big4
were identified. The selection of Big4 and non-Big4 in particular coincides with the
adoption of this scale globa lly.
Following previous research, this study uses DAs as a proxy for audit quality
because it is provides an indication of management’s active intervention in reporting
earnings (Johnson et al., 2002; Krishnan, 2003; Chi and Huang, 2004; Bae et al., 2007;
Dang, 2004; Zhou and Elder, 2001). Johnson et al. (2002) used the absolute level of DAs as
a proxy of the quality of financial reporting. The other proxy they used is the persistence
of the accrual components of earnings. Their use of the absolute level of DAs is pertinent
to the nature of their study and the existence of prior concerns regarding earnings
management. The researchers believe the magnitude of those DAs is an indicator of
management’s success in managing earnings in either direction (upward or downward);
contingent on the needs of the specific year (Reynolds and Francis, 2000).
In our study, we will not use absolute level of DAs because they were proven to

generate misleading findings. Companies receiving going-concern opinions were found
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to have large negative accruals (which are income-decreasing items). Those large
negative DAs might be a product of severe financial distress. Some researchers believe
such findings are inconsistent with earnings management and auditor conservatism
explanations for the relationship between audit opinion and DAs (Butler et al., 2004).
The level of DAs for firms is calculated by using the cross-sectional Jones model and
the cross-sectional modified Jones model. We start by estimating total accruals (TA)
using the cross-sectional Jones Model for both sectors. Each sector encompasses a
minimum of 20 firms for the duration of the study (2002-20 06):
TA
it
A
it21
¼ B
1jt
1
A
it21

þ B
2jt
DREV
it
2 DAR
it
A
it21


þ B
3jt
PPE
it
A
it21

þ 1
it
ðIÞ
where:
TA
it
Total accruals for firm i in year t calculated as the difference between net
income before extraordinary items and cash flow from operati ons
(Becker et al., 1998).
Ai
t2 1
Total assets of the previous period, i.e. at time t 2 1[1].
DREV
it
Revenue for firm i, in time t less revenues in time t 2 1.
PPE
it
Gross property, plant, and equipment for firm i in year t.
Then, we estimate non-DAs (NA) using the cross-sectional Jones model for each
industry group containing at least 20 firms in each year. The industry-year-specific
parameter estimates from the above cross-sectional Jones model are used to estimate the
firm-specific NA

it
for every year of the study. NA are calculated as a percent of lagged
total assets using the cross-sectional modified Jones model:
NA
it
A
it21
¼ B
1
1
A
it21

þ B
2
DREV
it
2 DAR
it
A
it21

þ B
3
PPE
it
A
it21

ðIIÞ

where:
DAR
it
Accounts receivable in time t less accounts receivable in t 2 1.
Other variables are as defined above.
DAs are the resulting residual after deducting NA from TA. Thus, (DA
i,t
) for firm i
in year t is calculated as:
DA
it
¼
TA
it
A
it 21
2
NA
i;t
A
it 21
ðIIIÞ
We use the quadratic form approach due to the curvilinear relationship expected to exist
between the audit firm tenure and the quality of DAs (Chi and Huang, 2004). However,
the model will be modified further for the purpose of testing our own hypotheses.
The model will incorporate the control variables: size, age, financial condition and
leverage. Control variables are elaborated in a section specified for this purpose. Cash
flows from operations scaled by lagged total assets[2]; are incorporated into our empirical
model since they have demonstrated an inverse variation with DAs (Dechow et al., 1999).
Audit tenure

and firm size
323
The following model is used to test H1:
DA
it
¼ b
0
þ b
1
TENURE
it
þ b
2
TENURE
2
it
þ b
3
OCF
it
A
it 21

þ b
4
LA
it
þ b
5
LEV

it
þ b
6
FC
it
þ b
7
AGE
it
þ 1
it
ðIVÞ
where:
DA
it
¼ the level of DAs for company i at time t.
TENURE
it
¼ the length of the audit firm-client relationship for company i at
time t calculated in years.
TENURE
2
it
¼ the squared value of the variable TENURE.
OCF
it
¼ operating cash flows for company i at time t.
LA
it
¼ the natural logari thm of total assets for company i at time t.

LEV
it
¼ the financial leverage ratio computed by scalin g total liabilities to
total assets of company i at time t.
FC
it
¼ the Altman Z-score for company i at time t[3].
AGE
it
¼ the number of years company i has been listed in a stock exchange
at time t.
H2 will be tested only if the results of testing H1 support the hypothesized relationship
between the audit firm tenure and audit quality.
The following model is used to test H2:
DA
it
¼ b
0
þ b
1
TENURE
it
þ b
2
TENURE
2
it
þ b
3
OCF

it
A
it 21

þ b
4
LA
it
þ b
5
LEV
it
þ b
6
FC
it
þ b
7
AGE
it
þ b
8
BIG4
it
þ 1
it
ðVÞ
BIG4
it
a dummy variable equals 1 if the company employs one of the Big4 audit firms

and 0 otherwise.
Control variables
To eliminate alternative explanations that might arise whilst investigating the
relationship between the variables, we control other cross-sectional factors that have
been shown previously to contaminate the relationship because of their systematic
effect on accruals. Controlling those variables would mitigate their systematic effects
and lend the findings greater reliability.
Absolute levels of unexpected accruals might mask the true source of those accruals
when they are large and negative in value. As highlighted earlier, some companies with
large negative accruals were found to receive going-concern opinions. This is considered
normal, given that large negative DAs might be a caution for financial distress
(Butler et al., 2004). For this reason, we control for the client’s financial condition
using the Altman Z-score, defined as the FC variable. Another reason we control
for the financial distress is that companies suffering a financial distress condition
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or near-debt constraints might be more motivated to manage earnings (Defond and
Jiambalvo, 1994).
We control for the client’s size using the natural log of total assets to eliminate the effect
of the firm size since large firms were proven to have larger and more stable accruals
(Dechow and Dichev, 2002). Prior research suggests that, there is more publicly available
information about larger companies and that their stock is more liquid (Brennan et al.,
1996; Gebhardt et al., 2001).The more the available information about a client and the more
liquid the stock is, the lower the perceived risk in the firm becomes (Boone et al., 2008). We
control for the client’s age using the control variable age to control the variation in the
firm’s accruals during the different stages of the firm’s life cycle (Anthony and Ramesh,
1992). In addition, older companies might be viewed as survivors and therefore perceived
as less risky (Boone et al., 2008). Collectively, age and size are controlled since large, more
mature companies, are expected to have more sophisticated financial-reporting systems

(Johnson et al., 2002). We control for the client’s leverage due to the notion that a higher
degree of financial leverage is expected to increase the perceived risk and increase the
client’s equity risk premium accordingly (Gebhardt et al., 2001).
Results and discussions
Sample statistics
Table I reports sample frequencies. Firms from the industry sector constituted
approximately 67 percent of the sample, while 33 percent of the firms were from the service
sector. In addition, 31 percent of firms in our sample engaged with their auditors for a
duration of 1-5 years, and 36.3 percent are engaged with their auditor for duration of
6-10 years. The variation of firms’ tenure would help in carrying out the analysis of the
data and obtain a reliable conclusion about the relationship between the variables.
Table II summarizes the descriptive statistics of industry and service sectors
collectively. The maximum tenure for both sectors is 52 years, with an average of ten
years. This could signal that some firms retained the same auditor since establishment,
or for very long engagements. Average leverage is fairly low (< 0.28), which suggests
that the majority of firms assets were financed through equity rather than debt.
Sector Tenure
Industry Service 1-5 years 6-10 years . 10 years
Percentage of firms 67.30 32.7 31 36.30 32.70
Table I.
Frequencies (both sectors)
n Minimum Maximum Mean SD
Tenure 358 1.00 52.00 9.7793 8.53491
LEVERAGE 358 0.00 0.92 0.2897 0.21735
AGE 358 1.00 69.00 21.2416 15.52294
OCF/A
t2 1
358 2 1.10 0.75 0.0430 0.15825
ROA 358 2 0.32 0.52 0.0524 0.08765
MB 358 0.04 399.28 10.6172 27.40387

Total ASSET (million) 358 1.00 508.00 33.3631 64.25991
Valid n (listwise) 358
Table II.
Descriptive statistics
(both sectors)
Audit tenure
and firm size
325
The average age of firms in our sample is 21 years. The mean of the market-to-book
ratio (10.61), suggests an overvaluation of firms stocks by investors. The average
return on assets was 0.05 and the average total assets were 33 million Jordanian Dinars
(JDs). Descriptive statistics of the industry and service sectors are presente d separately
in Tables III and IV consecutively.
As evident in Table III, the average tenure for firms in the industry sector is
approximately 11 years, while the average leverage is 0.28. The average age is 23 years
and the ROA 0.04, the MB 7.43, and the total assets are 26 million JDs on average.
The scenario is somehow different for the service sector. The average tenure for firms
in the servi ce sector is approximately eight years. However, the average leverage is 0.29,
close to that of the industry sector. Firms in the service sector seem to be on average,
younger than firms in the industrial sector (the average age of firms in the service sector
is 17.6). Both ratios: the ROA (0.07) and the MB ratio (17.0) are higher as exhibited by the
value of their means. Investment in the service sector is heavier than that in the industry
sector, as the average total assets (48 million JD s) suggests. The differences between the
statistics of the two sectors would improve the results of the study, that is, we have two
sectors and for each we have one short-term and one long-term tenure. The differences in
tenure would open the way for observing the differences in the results of the study and
for taking all possibilities in the relationship between tenure and audit quality.
Hypotheses testing
We run a cross-sectional linear regression on the variables of the equation used for
measuring the level of DAs in the specific hypothesis subject for testing. The length

of the auditor-client relationship is defined by the number of successive years
n Minimum Maximum Mean SD
Tenure 119 1.00 24.00 7.9916 5.32104
LEVERAGE 119 0.00 0.92 0.2966 0.026146
AGE 119 1.00 69.00 17.6345 17.16652
OCF/A
t2 1
119 2 1.10 0.51 0.0391 0.20301
ROA 119 2 0.19 0.52 0.0713 0.10037
MB 119 0.08 399.28 17.0086 43.38971
Total ASSET (million) 119 1.00 508.00 48.1765 79.95673
Valid n (listwise) 119
Table IV.
Descriptive statistics
(service sector)
n Minimum Maximum Mean SD
Tenure 239 1.00 52.00 10.6695 9.63513
LEVERAGE 239 0.01 0.84 0.2863 0.19218
AGE 239 1.00 56.00 23.0377 14.33845
OCF/A
t2 1
239 2 0.49 0.75 0.0450 0.13085
ROA 239 2 0.32 0.26 0.0430 0.07913
MB 239 0.04 87.17 7.4349 12.74519
Total ASSET (million) 239 1.00 409.00 25.9874 53.47877
Valid n (listwise) 239
Table III.
Descriptive statistics
(industry sector)
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the auditor has audited the client, producing variant number of years for different firms.
Tenure years were classified typically in the literature into one of three categories
according to their length: short (two to three years), medium (four to eight years) or long
(nine years or more).
Audit quality is measured using the level of DAs as a proxy. Levels of DAs sh ow the
proportions of differences amongst the observations in explicit figures, close in concept
to the ratio scale. Therefore, to reveal the differences among the sample observations as
per their varying tenure levels, the researchers will use the analysis of variance
(ANOVA) (Uma Sekaran, 2003). To assess the explanatory power of the models we use
for testing the study hypotheses, we calculate the adjusted R
2
.
Recall our H1 is:
H01. The length of the audit firm-client relationship does not have a significant
effect on audit quality.
And in the alternate format:
HA1. The length of the audit firm-client relationship has a significant effect on audit
quality.
We run a linear regression on the variables of equation (IV): DA, TENURE, TENURE
2
,
LA, LEVERAGE, AGE, FC, and OCF/T.ASSET to test the H1.
The ANOVA test for Model 1, used for testing H1, in Table V provides information
about the overall regression model. The value of the significance is 0.000, indicating a
statistically significant relationship between audit firm tenure and the quality of audit[4].
The adjusted R
2
is used to assess the explanatory power of models employed for

testing our hypotheses. It determines, in percentage, how much of the variation in DAs
level (the stu dy’s proxy for audit quality) is attributed to the length of the audit-firm
client relationship and the other variables in our models.
The summary of Model 1, Table VI, shows an adjusted R
2
of 43.8 percent. As the
percentage indicates, 43.8 percent of the level of DAs and the change in the level of DAs
is a product of the length of the audit firm-client relationship and the model’s other
variables.
Such percentage suggests: other factors that would improve Model 1 explanatory
power and contribute to the remaining variation in the level of DAs and audit quality,
are existent but have not been enclosed in our model.
Model RR
2
Adjusted R
2
SE of the estimate
1 0.671 0.450 0.438 0.14757
Table VI.
Model summary (both
sectors) – H1
Model Sum of squares Mean square F Sig.
1 Regression 5.927 0.847 38.880 0.000
Residual 7.252 0.022
Total 13.178
Table V.
ANOVA
(both sectors) – H1
Audit tenure
and firm size

327
Table VII shows the correlation coefficients for the variable TENURE to be 0.281 significant
at 0.05 and 0.365 for t he variable TENURE
2
significant at 0.05. The variables’ significance
supports the correlation, between DAs and audit firm tenure, revealed earlier in the
ANOVA analysis. Therefore, the null hypothesis is rejected and the alternate is accepted.
Given that the signs of the variables’ TENURE and TENURE
2
coefficients are
positive, we conclude that DAs and audit firm tenure are positively correlated, which
means that the longer the audit firm tenure, the higher the DAs and accordingly the
lower the audit quality. The finding implies that as the audit-firm client relationship
extends into more lengthy engagements, management’s incentives to mana ge earnings
and affect them deliberately intensify, resulting in the delivery of lower audit quality.
The correlation coefficient for the variable LA is 0.230 significant at 0.01, which
highlights a positive relationship between DAs reported and the client’s size. Therefore,
the larger the size of the firm, the greater management incentives to manage earnings
(measured by DAs), and the lower the quality of audits.
The variable LEVERAGE is significant at 0.01, and is negatively correlated with
DAs. The higher the leverage is; the greater management incentives to manage earnings
by reducing DAs, to meet debt constraints, and the better the resulting audit quality.
OCF to total assets ratio is negatively related to DAs. The correlation coefficient for the
ratio is 0.647 significant at 0.000. This indicates that the higher the cash flow from
operations; the lower management incentives to manage earnings, and the better the
resulting audit quality. This specific finding (results of testing H1) corroborates the
“learned confide nce effect”, where the auditor becomes less objective and his/her
independence is threatened because of employing less effort to detect material
misstatements. The confidence is established after the repeated multiple engagements
with the client in the case of lengthy auditor-client relationships, Johnson et al. (2002).

Since our H1 was substantiated, we will further scrutinize the Big4 variable to
examine if it enhances the effect the audit-firm tenure has on audit quality.
Recall our H2 is:
H02. The size of the audit firm does not enhance the effect of the audit firm-client
relationship length on audit quality.
And the alternate:
HA2. The size of the audit firm enhances the effect of the audit firm-client
relationship length on audit quality.
Unstandardized
coefficients Standardized coefficients
Model B SE
b
t Sig.
1 (Constant) 20.473 0.115 2 4.097 0.000
Tenure 0.010 0.005 0.281 2.133 0.034
Tenure
2
0.000 0.000 0.365 2.746 0.006
LA 0.085 0.017 0.230 5.068 0.000
LEVERAGE 20.165 0.043 20.183 23.882 0.000
AGE 0.000 0.001 2 0.061 2 1.400 0.162
OCF/T.ASSET 2 0.791 0.051 2 0.647 2 15.432 0.000
FC 0.000 0.000 0.051 1.215 0.225
Table VII.
Coefficients
(both sectors) – H1
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We run a linear regression on the variables of equation (V): TENURE, TENURE

2
, LA,
LEVERAGE, AGE, FC, OCF/T.ASSET, and BIG4 to test the H2.
The ANOVA test for Model 2, used for testing H2, in Table VIII was performed on a
significance level of 0.000 (, 0.01), indicating a statistically significant relationship.
However, we will drill deeper to explore the significance of the auditor size variable to
capture its preci se effect on the audit-firm tenure-audit quality relationship (Table IX).
The adjusted R
2
for Model 2, after the Big4 variable was added, is 43.8 percent; similar
to that of Model 1. This implies that Big4 variable did not improve the explanatory power
of Model 1, and therefore, the size of the audit firm does not affect the audit firm
tenure-audit quality association. It also supports our explanation of Model 1, in terms of
the existence of other factors which were not investigated in this study but would affect
the level of DAs, and audit quality accordingly.
As appears in Table X, the variable BIG4 is not significant at 0.05. Such significance
level establishes for accepting the null hypothesis, under which scenario the size of the
audit firm will have no effect on the audit-firm tenure-audit quality correlation. Stated
differently, the size of the audit firm does not foster the effect the length of the
auditor-client relationship has on audit quality. Hence, the longer the audit firm tenure
extends; the lowe r the audit quality descends regardless the size of the audit firm.
The failure of the auditor size in Jordan to enhance the effect the auditor tenure has on
the level of DAs can be explained as a normal result of our samplecharacteristics. Being the
Model Sum of squares Mean square F Sig.
2 Regression 5.943 0.743 34.092 0.000
Residual 7.235 0.022
Total 13.178
Table VIII.
ANOVA (both sectors) –
H2

Model RR
2
Adjusted R
2
SE of the estimate
2 0.672 0.451 0.438 0.14762
Table IX.
Model summary
(both sectors) – H2
Unstandardized
coefficients Standardized coefficients
Model B SE
b
t Sig.
2 (Constant) 2 0.503 0.119 2 4.218 0.000
Tenure 0.012 0.005 0.311 2.304 0.022
Tenure
2
0.000 0.000 0.393 2.895 0.004
LA 0.090 0.017 0.243 5.151 0.000
LEVERAGE 2 0.166 0.043 2 0.183 2 3.894 0.000
AGE 0.000 0.001 2 0.056 2 1.280 0.202
OCFASS 2 0.787 0.051 2 0.644 2 15.339 0.000
FC 0.000 0.000 0.048 1.140 0.255
BIG4 2 0.018 0.018 2 0.044 21.003 0.317
Table X.
Coefficients (both sectors)
– H2
Audit tenure
and firm size

329
majority of our sample firms’ auditors, and having engagements positioned mostly in the
long tenure category as well, it is probable that the “learned confidence”, rather than
the “learning effect” governed big audit firms engagements with their clients. The size of
the audit firm was proved to afford it an auditing advantage, reflected by superior audit
quality, only during the early years of the audit engagement (Chi and Huang, 2004;
Teoh and Wong, 1993; Dopuch and Simunic, 1982; Watts and Zimmerman, 1986).
Conclusion and recommendations
This study examines the relationship between audit quality measured by the level of DAs
and two auditor specific factors: the length of the audit firm-client relationship (audit-firm
tenure) and the size of the audit firm in Jordan. The length of the audit-firm client
engagement was found to negatively affect the quality of audit reported by publicly
traded firms in Jordan. This result is consistent with previous studies that revealed a
negative correlation between audit quality and audit tenure (Deis and Giroux, 1992;
Deis and Giroux, 1996; Copley and Doucet, 1993; Geiger and Raghunandan, 2002;
Casterella et al., 2002). Furthermore, the result aligns with the nature of the Jordanian
Market where most firms, as the mean tenure demonstrated, engaged with their auditors
for long tenures (nine years or more). Long engagements might have created a learned
confidence in the client, jeopardizing the auditors’ independence and objectiveness. It may
produce biased behavior when the auditor develops a loyal, personal and non-professional
attachment with the client, and loses the motive to perform the audit process with due
professional care and in compliance with the latest and best practices in the industry.
This conclusion is pertinent to the debate surrounding mandatory audit-firm
rotation, where proponents of the necessity to rotate audit firms argue that lengthy audit
firm-client relationsh ips produce declining audit quality as a result of either of the
following:
.
Some clients have a good reputation in terms of the financial reporting controls,
accurate financial statements and the integrity and competence of top
management. Under this scenario, a certain satisfaction resulting from the

learned confidence, might develop between the audit team, if they expect the client’
properties to persist in the future Therefore, the conventional level of skepticism
required to conduct the audit professionally with due care will deteriorate. The
opposite would be the case if a new unaware auditor deals with the same
engagement, driven by the necessity to obtain client-specific knowledge, using
innovative techniques in the client’s audit and considering the client’s financial
statements, controls and management behavior as subjects to skepticism and
professional criticism (Johnson et al., 2002; Carcello and Nagy, 2004).
.
Some audit firms might view their long tenure clients as a perpetual annuity
source, or client-specific quasi-rents that represent an annuity. In both cases, the
auditor’s independence would be compromised when trying to sustain such
annuity (DeAngelo, 1981b; Carcello and Nagy, 2004).
The researchers emphasize in this context that the distinctive character of Jordanian
society being divided into tribal communities and the resulting mutual trust amongst
individuals, in addition to the necessity to favor personal interests and social relations,
could also be a risk factor even for professional engagements. The small size of the
Jordanian community may have built such personal, rather than professional-like
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relationships more quickly and developed an acquaintance with the client, where in
either case, the product would be an impaired audit quality. The argument at this point
establishes reasonable justification for the mandatory audit firm rotation. Therefore,
we infer that rotating the audit firm will enhance auditor independence and audit quality
in Jordan.
This study also shows that, the size of the audit firm does not enhance the effect of
the audit firm-client relationship length on the quality of audits in Jordan. The longer
the audit firm tenure, the lower the audit quality regardless of the audit firm size. The
result coincides with the nature of the Jordanian market being dominated by big audit

firms. As shown earlier in the sample statistics, the majority of publicly traded firms
(89 percent) were engaged with big auditors. In addition, the mean tenure reflected
lengthy engagements with auditors (nine years or more). Prior literature that proved
employing big audit firms improve the quality of audits delivered, substantiated the
improvement exists in the early years of the engagement when auditors are not familiar
with the client. When the auditor constructs sufficient cl ient-specific knowledge, the
effect of the size of the audit firm on the audit quality becomes insignificant (Knapp,
1991; Johnson et al., 2002; Chi and Huang, 2004).
Finally, on the basis of the findings of the study, the researchers would suggest that the
audit firm should be rotated in order to enhance auditor independence and audit quality
and increase shareholders’ and stakeholders’ confidence in financial statements. Such
rotation will open the door for new auditors to investigate the client with better scrutiny
and due care. We encourage future research to uncover all variables that could possibly
affect the audit quality and establish robust evidence on either the necessity of the
mandatory audit firm rotation, or the disadvantages of such rotation on the audit quality.
The researchers would suggest also that audit quality is measured using other proxies,
such as the persistence of the accrual component of earnings (Johnson et al., 2002) and
other types of DAs (Krishnan, 2003). In addition, other factors that affect audit quality and
are auditor-specific factors, e.g. the specialization in the audit industry (Schauer, 2002,
2003), should be examined in future research. An investigation of the auditor size effect on
audit quality from the perception of other groups, e.g. investors (Lie et al., 2007), or using
other measures like questioned costs (Tate, 2002) is encouraged as well.
Notes
1. Also known as lagged total assets.
2. Total assets of the previous period.
3. The Altman Z-score for the financial condition is computed using the following equation:
1:2
*
Working Capital
Total Assets


þ 1:4
*
Retained Earnings
Total Assets

þ 3:3
*
Earnings before Interest and Taxes
Total Assets

þ 0:6
*
Market Value of Equity
Book Value of Total Debt

þ 1:0
*
Sales
Total Assets

4. Note that: 0.000 , 0.01.
Audit tenure
and firm size
331
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Web sites
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Corresponding author
Ali Abedalqader Al-Thuneibat can be contacted at:
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