Audit tenure and the equity risk premium: evidence from Jordan

Purpose – The purpose of this paper is to investigate the relation between audit firm tenure and the perceived audit quality measured by the client-specific equity risk premium. The study population consists of all the manufacturing and service firms traded in Amman Bourse during the period 2002-2005. Design/methodology/approach – The Boone et al. model – with some modifications – was used for testing the hypotheses. Findings – The results show that the relation between audit firm tenure and equity risk premium is positive, the equity risk premium increases with tenure as a result of reduced audit quality. These results were consistent with some previous studies, which showed that long relationships between an audit firm and a client are associated with lower perceived audit quality and, as a result, higher equity risk premium. Practical implications – The audit firm should be rotated in order to enhance auditor independence and audit quality, and increase investors' confidence in reported earnings. Additionally, investors are encouraged to give higher attention to the tenure of the audit firm when evaluating the quality of the financial reports of the companies they are planning to invest in. Originality/value – This is the first paper to provide evidence from a developing country about an important issue – audit quality – which is expected to support and sustain improvement of audit quality, and therefore, financial reporting quality.Auditing, Auditors, Equity capital, Jordan, Stakeholder analysis

The effect of qualified auditors' opinions on share prices: evidence from Jordan

Purpose – This study aims at investigating the effect of the qualified audit reports on shares prices and returns in Jordan. Design/methodology/approach – A market-based study conducted on the qualified audit reports of the shareholding companies in Jordan during the period 2000-2005. Findings – The conclusions of the study showed that there is no clear or significant effect of a qualified audit opinion on share prices and returns. Practical implications – Based on the conclusions of the study, the researchers recommend there is a need for further educating users of the role of the audit report and the need for extending this study to investigate the effect of the qualified audit reports on share prices and returns during other periods and using different test periods other than the announcement date. Originality/value – This study is original because it provides us with new evidence about the effect of qualified audit reports on shares prices and returns in a developing country.Audit reports, Auditing, Jordan, Share prices

Do audit tenure and firm size contribute to audit quality?: Empirical evidence from Jordan

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.Auditing standards, Auditors, Developing countries, Expenses, Financial reporting, Jordan