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This study examines whether the length of the relationship between a company and an audit firm (audit‐firm tenure) is associated with financial‐reporting quality. Using two proxies for financial‐reporting quality and a sample of Big 6 clients matched on industry and size, we find that relative to medium audit‐firm tenures of four to eight years, short audit‐firm tenures of two to three years are associated with lower‐quality financial reports. In contrast, we find no evidence of reduced financial‐reporting quality for longer audit‐firm tenures of nine or more years. Overall, our results provide empirical evidence pertinent to the recurring debate regarding mandatory audit‐firm rotation — a debate that has, to date, relied on anecdotal evidence and isolated cases.

This study investigates whether an auditor's objectivity is impaired by nonaudit services or by the level of economic dependence on a client. Like several contemporaneous studies, we use recent mandated proxy statement audit and nonaudit fee disclosures to measure economic dependence and we use discretionary accruals as a surrogate for auditor objectivity. The results in the extant literature are mixed. We provide some explanations for those inconsistent results. First, we replicate the results of Frankel et al. (2002), finding, as they did, a significantly positive association between the relative level of nonaudit fees and discretionary accruals. Second, we document that this initial result is primarily due to small-tomedium-sized high-growth firms, especially firms having initial public offerings and in the e-commerce, biomedical, telecommunication, and pharmaceutical industries. After factoring these characteristics into the analysis, we find no evidence that the relative level of nonaudit service fees impairs an auditor's objectivity.

This study examines how using the internal audit function (IAF) as a management training ground (MTG) affects external audit fees and the external auditors' perceptions of the IAF. Over half of all companies that have an IAF specifically hire internal auditors with the purpose of rotating them into management positions (or cycle current employees into the IAF for a short stint before promoting them into management positions). Using archival data, we find that external auditors charge higher fees to companies that use the IAF as a MTG. Using an experiment, we provide evidence as to why fees are higher. Specifically, we find that external auditors perceive internal auditors employed in an IAF used as a MTG to be less objective but not less competent than internal auditors employed in an IAF not used as a MTG. These results have important implications for the many companies that use their IAF as a MTG. Data Availability: Contact the authors. Data provided by the Institute of Internal Auditors Research Foundation are subject to restrictions.

SUMMARY This study proposes that earnings autocorrelation and earnings volatility are associated with audit fees. Autocorrelation and volatility are time-series of earnings characteristics that may affect an auditor's perception of inherent risk. In response to greater inherent risk, auditors should conduct more extensive substantive testing to reduce the overall risk associated with the audit. We find a negative (positive) association between earnings autocorrelation (volatility) and audit fees. The results indicate that a shift in the interquartile range in earnings autocorrelation and earnings volatility combined is associated with a 4.0 percent change in audit fees, which amounts to approximately $95,600 for the average firm-year observation in our primary sample. We also find that the relation between earnings autocorrelation and audit fees is attenuated for industry-specialist auditors, consistent with specialists responding to lower earnings autocorrelation more efficiently than non-specialists.