The Effect of Auditors’ Tenure on Short-Term Financial Liquidity – A Conceptual Framework

Abstract

There is an alarming increase in audit scandals worldwide, negatively affecting financial statement users. These scandals happen soon after firms get an unqualified audit report, which would have confirmed their short-term financial liquidity. In most of these scandals, auditors have long associations with clients. The main question is whether auditors’ long association with a client affects a client’s financial liquidity. This paper aims to analyse the impact of auditors’ tenure on financial liquidity. The literature review and conceptual framework development approach have been applied as a methodology. The existing literature on the subject has been consulted, and the framework has been developed based on the reviewed literature. The paper has found no direct correlation between auditor tenure and short-term financial liquidity. Auditors’ tenure, short-term financial liquidity, company culture, board of directors, management/leadership, and mandatory rotations play a major role in the increasing audit scandals. The auditors and accountants of firms must closely monitor these variables. The audit scandal will continue if appropriate risk-mitigating strategies are not in place to control all these variables. Future research may use quantitative methodologies to further contribute to the existing literature to get the direct correlation between the auditor’s tenure and short-term financial liquidity