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

Recent amendments to Auditing Standard (AS) 3101 require disclosure of the initial year of the auditor-client relationship. As potential changes to the standard were being discussed, auditors, clients, and some PCAOB members expressed reservations about the necessity of tenure disclosures and were particularly concerned about including tenure information as part of the audit report. Our purpose in this study is to investigate whether the tenure disclosures now mandated by AS 3101 are associated with changes in stakeholder behavior. We find that after the implementation date, shareholder ratification votes against the auditor and the probability of subsequent auditor dismissal increase for long-tenured versus short-tenured auditors. Our auditor dismissal findings are particularly strong when changes in ratification voting are most negative. We also find some evidence that negotiating power decreases for long-tenured auditors in the post-disclosure period 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, suggesting that the placement of the disclosure in the audit report is an important determinant of stakeholder behavior