The Impact of Mandatory Auditor Tenure Disclosures on Ratification Voting, Auditor Dismissal, and Audit Pricing

62 Pages Posted: 4 May 2020 Last revised: 9 Jun 2021

See all articles by Ryan Dunn

Ryan Dunn

Auburn University - School of Accountancy

Nathan G. Lundstrom

University of Kansas

Michael S. Wilkins

University of Kansas

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2021

Abstract

Recent amendments to Auditing Standard (AS) 3101 require disclosure of the initial year of the auditor-client relationship in the audit report. As the standard was being discussed, auditors, clients, and some PCAOB members expressed reservations about the necessity of tenure disclosures and were particularly concerned about disclosing tenure in the audit report. Our purpose is to investigate whether the tenure disclosures mandated by AS 3101 are associated with changes in stakeholder behavior. We find that after the implementation date, ratification votes against the auditor and the probability of subsequent auditor dismissal increase for long-tenured versus short-tenured auditors. Results from a path analysis further suggest that the relative increase in dismissal for long-tenured auditors appears to be influenced directly through tenure disclosures and indirectly through ratification voting. We also find that negotiating power may decrease for long-tenured auditors as evidenced by lower audit fees. Our results are comparable for companies that voluntarily disclosed and companies that did not disclose auditor tenure in their proxy statements prior to the AS 3101 amendment. Overall, our study suggests that mandatory disclosure of auditor tenure in the audit report significantly affects stakeholder behavior. The PCAOB should consider our findings carefully as they evaluate whether AS 3101 is achieving its intended purpose.

Keywords: Auditor Tenure, PCAOB, Auditor Ratification, Auditor Dismissal, Audit Fees

Suggested Citation

Dunn, Ryan and Lundstrom, Nathan G. and Wilkins, Michael S., The Impact of Mandatory Auditor Tenure Disclosures on Ratification Voting, Auditor Dismissal, and Audit Pricing (June 8, 2021). Available at SSRN: https://ssrn.com/abstract=3570919 or http://dx.doi.org/10.2139/ssrn.3570919

Ryan Dunn

Auburn University - School of Accountancy ( email )

415 West Magnolia Avenue
301 Lowder Business Building
Auburn, AL 36849
United States

Nathan G. Lundstrom

University of Kansas ( email )

1654 Naismith Drive
Lawrence, KS 66045
United States

Michael S. Wilkins (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
1654 Naismith Dr.
Lawrence, KS 66045
United States

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