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

TLDR

The study investigates how audit firm tenure and auditor‑provided non‑audit services influence audit quality using internal assessments from a Big 4 firm. It analyzes these internal audit quality assessments to evaluate the impact of tenure and non‑audit services on audit quality. First‑year audits score lower, improve, then decline with long tenure—decline driven by private clients, whereas SEC registrants peak with very long tenure; audit fees are discounted in year one but effort is higher; overall NAS fees show no average link to quality, but are positively associated with SEC registrants and negatively with private clients, underscoring regulatory implications.

Abstract

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.