Pre and Post-SOX Associations between Audit Firm Tenure and

Journal of Forensic & Investigative Accounting Vol. 1, Issue 1 Pre and Post-SOX Association between Audit Firm Tenure and Earnings Management Risk Santanu Mitra Donald R. Deis *Mahmud Hossain Recent proposals to limit auditor tenure to enhance audit quality and current requirements for the auditor to determine the risk of material misstatement and to assess the likelihood of fraudulent financial statements motivate our research on how the association between the auditor tenure and earnings management risk has evolved prior to and after the Sarbanes-Oxley Act of 2002 (SOX). The relationship between auditor tenure and audit quality has been a controversial issue for years. As the Enron and WorldCom fiascoes illustrate, high-profile financial scandals 1give proposals to limit auditor tenure a lot of ―curb appeal.‖ Although Congress considered requiring the mandatory rotation of audit firms in SOX, they choose to require the rotation of 2lead and reviewing engagement partners instead. Just two years later however, a $9 billion financial statement fraud at Fannie Mae renewed concerns over auditor tenure when part of the blame fell on KPMG, Fannie Mae‘s auditor of 36 years (Department of Housing and Urban Development‘s Office of Federal Housing Enterprise Oversight (OFHEA) 2006). Subsequently, the Department of Housing and Urban Development (HUD) issued a proposal for the mandatory * The authors are, ...