Incumbent Auditor Independence and Predecessor Auditor Tenure

Prior studies examine incumbent auditor tenure and independence. In this article, we examine predecessor auditor tenure and incumbent auditor independence. We find a negative association between predecessor auditor tenure and the likelihood of incumbent auditor change and a positive association between long predecessor auditor tenure and long incumbent auditor tenure. We also find a positive (negative) association between predecessor auditor tenure and incumbent auditor going concern opinions (type II going concern errors) among financially distressed firms. Our findings indicate that predecessor auditor tenure signals client commitment to the auditor in the audit process and that this commitment facilitates greater incumbent auditor independence among financially distressed firms. Further analysis indicates that predecessor auditor tenure enhances incumbent auditor independence early in the auditor-client relationship. Our findings are important as regulators, investors, and other stakeholders attempt to better understand auditor independence. Our findings also highlight that mandatory auditor rotation may limit a client's ability to signal its commitments to the auditor-client relationship.