Audit Firm Tenure, Non-Audit Services, and Internal Assessments of Audit Quality

Posted: 22 May 2015

See all articles by Timothy B. Bell

Timothy B. Bell

KPMG International, LLP - Assurance & Advisory Services Center

Monika Causholli

University of Kentucky - Von Allmen School of Accountancy

W. Robert Knechel

University of Florida - Fisher School of Accounting

Date Written: May 2015

Abstract

We use data from internal assessments of audit quality in a Big 4 firm to investigate the impact of audit firm tenure and auditor-provided non-audit services (NAS) on audit quality. We find that first-year audits receive lower assessments of audit quality and that quality improves shortly thereafter and then declines as tenure becomes very long. Partitioning our sample between SEC registrants and private clients, we find that the decline in audit quality in the long tenure range is attributable to audits of private clients. For audits of SEC registrants, the probability of a high quality audit reaches its maximum with very long tenure. We also find that audit fees are discounted for first-year audits but auditor effort is higher than in subsequent years. We find no association, on average, between total NAS fees and audit quality in the full sample but observe that total NAS fees are positively associated with quality for SEC registrants and negatively associated with quality for privately held clients. Our findings are important for regulatory policies related to audit firm tenure and auditor-provided NAS.

Keywords: audit quality, audit firm tenure, non-audit services

JEL Classification: M40, M41, G18, L84

Suggested Citation

Bell, Timothy B. and Causholli, Monika and Knechel, W. Robert, Audit Firm Tenure, Non-Audit Services, and Internal Assessments of Audit Quality (May 2015). Journal of Accounting Research, Vol. 53, No. 3, 2015. Available at SSRN: https://ssrn.com/abstract=2608541

Timothy B. Bell

KPMG International, LLP - Assurance & Advisory Services Center ( email )

300 Tice Bouldevard
Woodcliff Lake, NJ 87675
201-505-2006 (Phone)

Monika Causholli

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

W. Robert Knechel (Contact Author)

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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