Audit firm tenure and earnings forecasts accuracy: evidence from firms listed in Tehran Stock Exchange

Under the assumption that audit quality is directly related to financial reporting quality، this study examines how audit firm tenure affects audit quality and by its implication، it is associated with the predictability of accounting earnings using management earnings forecasts. Using a sample of firms listed on the Tehran Stock Exchange، our results show that in the early years of audit firm tenure، the accuracy (errors) of earnings forecasts are high (low) and low (high) in the later years of tenure. These results are consistent with the “auditor expertise” hypothesis which predicts higher audit quality in the early years of auditor tenure and the “auditor independence” hypothesis predicting lower quality audits with extended tenure. Overall، our results provide some support for the policy of audit firm rotation.