How the length of the auditor–client relationship affects audit quality
Auditing the auditors.
When an auditor is first appointed to a company, they encounter a steep learning curve as they seek to understand the business and its environment. Over time, this becomes easier, as the auditor gains knowledge about their clients.
But over the long term, does this auditor–client relationship start eroding the independence of the auditor, and therefore the quality of the audit?
Dr Masoud Azizkhani, a researcher and a senior lecturer at the Tasmanian School of Business and Economics, has studied this question for more than a decade, beginning with his PhD in the early 2000s.
“At that time, it was a really hot topic, and it still is,” he says. “Many people were speculating about auditors’ independence – is it right for auditors to be connected to their client for a long time? How does the market perceive that? Is it a good or a bad thing?”
Dr Azizkhani has published a number of papers on the subject, both in Australia and overseas, and they show that beyond a ‘tipping point’ of about seven years, a long-term auditor–client relationship can impact negatively on the market perception of that company.
“Results show that longer partner tenure is associated with a higher cost of equity capital,” he says.
This policy has had an impact on business, as Dr Azizkhani’s work has shown that mandatory rotation of audit partners affects audit costs, and this is passed on to audit clients in the form of higher audit fees.
“Big audit firms can absorb the additional cost, but small accounting firms can’t, so it’s passed on to the client,” he says.
Dr Azizkhani is now focussed on this policy internationally. In 2014, the European Union introduced a 10-year mandatory audit firm rotation policy, and in his former country Iran, a company needs to change its audit firm every four years.
“That four-year period is quiet short,” Dr Azizkhani remarks.
“Our research shows that when there are other fundamental problems in the audit market, the rotation policy is not going to work. For example, when the demand for a high-quality audit is weak, mandatory audit firm rotation isn’t going to change that. And when competition in the audit market is mainly based on audit fees, rotation isn’t going to fix the audit quality issue.”
Dr Azizkhani joined the University of Tasmania in 2018, and obtained his PhD at the Australian National University (ANU) in Canberra.
Because of the globalisation of information that is now available, he says he’s well-placed to be conducting research with an international focus.
“As long as I have access to the major databases, it doesn’t matter whether I’m conducting my research in Sydney or Hobart,” he says.
Research that makes a difference
Dr. Masoud Azizkhani is a Senior Lecturer at the School of Accounting, Economic and Finance in the College of Business ad Economics. His research is in the field of auditing and corporate governance.
Before joining the University of Tasmania, Masoud was a lecturer at the Australian National University (ANU) during 2012-2016. He also worked at the Ilam University (Iran) as an Assistant Professor.
Masoud also worked at the Iranian Securities and Exchange Organisation (SEO) chairing the XBRL project in Iran during 2009-2011.
- PhD, Australian National University. 20058. Thesis: Auditor type, the length of auditor-client relationship, and the perceived credibility of financial reporting.
- Master of Accounting, Tehran University. Iran. 2000. Thesis: an examination of the efficiency of combined forecasting method in forecasting stock price: evidence from Tehran Stock Exchange.
- Bachelor of Accounting, Iranian Petroleum University. 1998.
Languages (other than English)
- CPA Australia
- Member of the Accounting and Finance Association of Australia and New Zealand
- Member of the European Accounting Association
- Head of Accounting Discipline, University of Tasmania
- Head of Accounting Department, Ilam University, Iran
- Convenor of the Master of Commerce, ANU
- Audit and Assurance
- Management Accounting
- Advanced auditing
- The economics of auditing
- Audit quality and quality of financial reporting
- Audit market structure, audit pricing and audit quality
- Corporate governance and the quality of financial reporting
Masoud is currently involved in four international projects. Two projects are aimed to investigate the value relevance of specialised disclosure and the new accounting standard in the US capital market. Two other projects aim to investigate the impact of changes in corporate governance structure on the quality of financial report in Iran.
- Research Performance Award, University of Ilam (Iran) 2017
- Research Performance Award, University of Ilam (Iran) 2011.
- Research Enhancement grant Scheme, the Australian National University (2011)
Fields of Research
- Accounting, Auditing and Accountability (150199)
- Accounting Theory and Standards (150101)
- Auditing and Accountability (150102)
- Expanding Knowledge in Commerce, Management, Tourism and Services (970115)
- Administration and Business Support Services (900201)
Journal Article(5 outputs)
|2019||Kermani NJN, Mollanazari M, Rahmani A, Azizkhani M, 'Identification and Disclosure of Key Audit Matters in the Audit Report Outlook of Iranian', Journal of Management Accounting and Auditing Knowledge, 8, (29) pp. 229-242. ISSN 2322-5785 (2019) [Refereed Article]|
|2018||Azizkhani M, Daghani R, Shailer G, 'Audit firm tenure and audit quality in a constrained market', The International Journal of Accounting, 53, (3) pp. 167-182. ISSN 0020-7063 (2018) [Refereed Article]|
Citations: Scopus - 3Web of Science - 2
|2018||Kalantari N, Pour RM, Seidi M, Shiri A, Azizkhani M, 'Fuzzy Goal Programming Model to Rolling Performance Based Budgeting by Productivity Approach (Case Study: Gas Refineries in Iran)', Advances in Mathematical Finance and Applications, 3, (3) pp. 95-107. ISSN 2538-5569 (2018) [Refereed Article]|
|2013||Azizkhani M, Monroe GS, Shailer G, 'Audit partner tenure and cost of equity capital', Auditing, 32, (1) pp. 183-202. ISSN 0278-0380 (2013) [Refereed Article]|
Citations: Scopus - 19Web of Science - 18
|2010||Azizkhani M, Monroe GS, Shailer G, 'The value of Big 4 audits in Australia', Accounting and Finance, 50, (4) pp. 743-766. ISSN 1467-629X (2010) [Refereed Article]|
Citations: Scopus - 16Web of Science - 12
|2020||Azizkhani M, 'Audit Manual for Small Entities', Centre for Professional Accounting and Auditing Studies and Training Iranian Association of Certified Public Accountants, Iran (In Press) [Authored Other Book]|
Conference Publication(1 outputs)
|2019||Azizkhani M, Gupta PP, Sami H, Xu S, 'Specialized Corporate Disclosures and Information Asymmetry in U.S. Capital Markets', 2019 American Accounting Association Annual Meeting, 9-14 August 2019, San Fransisco (2019) [Conference Extract]|
Grants & Funding
Masoud has been able to obtain funding for his research. These include funding from the College of Business and Economics (ANU) in 2014; AFAANZ grant in 2015 & 2018; a research grant from the Iranian Association of Certified Public Accountants.
Number of grants
- The project intends to examine the impacts of audit committee chairs characteristics (specifically, gender, financial expertise, tenure, industry experience and remuneration) on (a) auditor choice, (b) audit fees, and (c) audit quality.
- Accounting & Finance Association of Australia and New Zealand Ltd ($5,000)
- Administered By
- University of Tasmania
- Research Team
- Azizkhani M; Hossain S
Masoud has significant experience in supervising research students at honours, master and PhD levels. Here is a selected list of recent HDR projects:
- Dose industry complexity matter? A study of the impact of audit committee financial expertise on audit quality- (Honours) 2018
- Auditor industry specialisation and information asymmetry in the U.S. banking industry: Honours thesis, completed 2014.
- Developing a mathematical model for performance-based budgeting using a rolling-budget in the Iranian gas refinery industry: PhD thesis, completed 2018
- Market timing in financing decisions: PhD thesis, completed 2015.
- The effect of mandatory audit firm rotation on audit fees: evidence from Iran. Master of Accounting thesis, completed 2014
|PhD||The Relationship between CSR Disclosure Guidelines and the Implementation of these Guidelines in a Developed and Developing Country||2018|
|Masters||Achieving Better Outcomes for Chinese Accounting Students Studying in Australia||2020|