Audit regulation and auditors’ behaviour: the impact of auditor tenure disclosure on audit quality

This paper investigates the impact of mandatory auditor tenure disclosure in the auditor’s report on auditors’ behaviour regarding audit quality. Specifically, we examine audit outcomes following the implementation of PCAOB Auditing Standard (AS) 3101, which requires auditors to disclose the year they began serving consecutively as the company’s statutory auditor. The rule became effective for fiscal years ending on or after December 15, 2017. Using a differences-in-differences approach, we assess changes in audit quality by comparing firms subject to the regulation in 2017 with those not yet required to disclose auditor tenure. While previous research has documented investors’ reactions to AS 3101, its effect on audit quality remains unexplored. We find some evidence suggesting that the transition from voluntary to mandatory disclosure influenced auditors’ decisions, leading to more conservative financial reporting and higher audit quality. Notably, we do not find strong evidence that the effect is more pronounced for firms with long-tenured auditors in the post-implementation period. Rather, the greater transparency, reliability, and salience of tenure information following the PCAOB’s mandate appear to have influenced auditors regardless of tenure length. Plausibly anticipating heightened public scrutiny, auditors across tenure levels adjusted their behaviour accordingly, contributing to improved audit quality.