The Effect of Audit Tenure and Audit Office Size on Financial Reports Quality: An Applied Study on Saudi Public Companies

Abstract

The current study aimed to know the effect of the length of audit period and the size of audit firm on the quality of the financial statements applied to Saudi joint stock companies. The study focused specifically on the effectiveness of the length of audit period set by the Saudi regulations as a maximum of five years, with no minimum period.

To examine the effect of both the length of the period and the size of the office on the quality of financial statements, the study relied on the quantitative analysis approach using the multiple linear regression model. The level of the discretionary accruals was used as an indicator of the quality of the financial statements. It was extracted using the modified Jones model according to (Dechow et al., 1995). The study was applied to joint stock companies registered in the Saudi capital market during the period (2003-2016); however, the banking and insurance sectors were excluded.

The results of the study concluded that the length of the audit period, set as a maximum of five years, lead to a reduction in discretionary accruals as measured by the absolute value, and hence improves the quality of financial statements. Also, the results indicated that there was a significant statistical relationship between the long audit period (4 to 5 years) and the quality of the financial statements. However, there was no relationship between the short audit period (maximum of 3 years) and the absolute value of discretionary accruals. In addition, the results showed that the big auditing firms were better than small auditing firms in terms of limiting the earnings management, and hence improve the quality of financial statements. In particular, the results showed that big auditing firms were faster in gaining knowledge during the short audit period as compared to small auditing firms.