Studying the Relationship between Auditor Tenure and Management of Real Activities in Pharmaceutical Companies Listed on the Tehran Stock Exchange

The Concerns about the effects of long-term relationships between auditor and client on the auditor independency and audit quality have led to formulate regulations such as mandatory rotation of auditors for limiting these relationships, but in the case of increasing the long-term relationships and managerial behaviors, there exist some contradictory results. Hence, this study intends to examine the relationship between auditor tenure and the management of real activities in pharmaceutical companies. In order to measure the management of real activities, three indicators of overproduction, abnormal discretionary costs, and abnormal operational cash flows have been used. The population of this research consist of all the pharmaceutical companies listed on the Tehran Stock Exchange, and the statistical sample contain 20 active companies in the pharmaceutical industry from 2004 to 2012. Moreover, the purpose of this study is applied, its method is correlational and Ex-Post Facto. The model of Panel data has been used to test the research hypotheses. The results of the research show that there is a significant and positive relationship between auditor tenure and the management of real earnings indicators. Also, the relationship between auditor tenure and abnormal overproduction costs is different from its relationship with abnormal discretionary costs. The interpretation of findings suggest that the long-term relationships between the auditor and the client creates a friendship relation between them, and it reduces the auditor independency. It also appears that the intensity of this relationship in the companies managing their activities through overproduction is greater than those companies which are managed by discretionary costs.