Abstract The main purpose of the study is to examine the relationship between audit firm tenure and auditor reporting quality in Malaysia。 This study employs well-established going concern model of logistic regression。 Our findings show that audit firm tenure is positively significant relationship with auditor reporting quality。 Future research should consider other importance variables that may affect the auditor reporting quality such as non-audit services, and audit partner tenure。 However, in sum, this study is in line with the recent decision by the regulators not to regulate a mandatory audit firm rotation in Malaysia。 This study provides a very importance implication and as a cornerstone to the regulators and policy makers in a developing country as the issue continues to be strong interest among them in improving the auditor independence。85079

Keywords: Audit firm tenure, Auditor reporting quality, Malaysia

1。Introduction

In the past few years, auditors had been blamed due to their role in the mega corporate scandals such as Enron, WorldCom, Global Crossing, ImClone Systems and Tyco International。 The criticism had raised lots of questions regarding auditors’ independence。 Besides, such criticism was leveled against auditors because they audit their clients for a long time and subsequently concentrated more on non-audit services rather than audit。 For example in the case of Enron, Andersen was the auditor since Enron was set up until collapsed。 Therefore, there has been a call for sweeping changes in the auditing profession to ensure independence and therefore improve their audit quality (“Auditing Profession”, 2002)。

The issue of an audit firm compromise their independence if they audit their client for a long time has been a subject of debate in the United States, which can be traced back at least 50 years ago (Mautz & Sharaf, 1961)。 Later, the issue

seems to be pertinent international recurring debate among regulators, auditors and academicians (Shockley, 1981; Arrunada & Paz-Ares, 1997; Geiger & Raghunandan, 2002; Johnson, Khurana & Reynolds, 2002)。 Such long-term relationships could, in reality or be perceived to, make the audit firms too committed or beholden to the companies, thereby undermining its independence, compromising its objectivity, and reducing its effectiveness (“Auditing Profession”, 2002)。 Therefore, several countries in European Union such as Italy and Spain have required  the mandatory audit firm rotation (Geiger & Raghunandan, 2002)。

However, even in such a mandatory auditor rotation regime, there is insufficient evidence to suggest that audit quality is improved by this means。 For example, the scandal involves a company namely Parmalat in Italy complied with a law that requires companies to change their auditors every nine years。 The discovery of losses amounting to RM41。8 billion in Parmalat has provoked outrage across continent of Europe and proves that the law of auditor rotation still does not help to improve audit quality。 (“Scandal”, 2003)。

Following the corporate scandals in the United States, the regulators in Malaysia such as the Malaysia Securities Commission (SC) and the Bursa Malaysia became more concerned with the mandatory audit firms rotation。 In view of the importance of the issue in question, the Malaysian Institute of Accountants (MIA) and the Malaysia Institute of Certified Public Accountants (MICPA), who are the accounting governing bodies in Malaysia, agreed to establish an MIA/MACPA joint Taskforce on Auditor Independence in May 2002。 Both institutes agreed that the overall disadvantages of mandatory rotation of audit firms, including exorbitant costs, disruption and loss of accumulative knowledge, and a restriction on the freedom of companies to choose their own auditors, outweigh the benefits that may be derived from such rotation of audit firms。 (Malaysian Institute of Accountants, 2002)