Audit Tenure Effects on Financial Reporting Quality and Independenc

Abstract

This research investigates the complex and non-linear relationship between audit tenure
and the dual constructs of financial reporting quality and auditor independence, challenging
the prevailing assumption of a simple monotonic relationship. While existing literature predominantly focuses on either quality deterioration due to familiarity or improvement due to
learning, this study posits a triphasic model where the effects evolve distinctly across three
tenure phases: the nascent phase (years 1-3), the maturation phase (years 4-7), and the
elongated phase (years 8+). Our novel methodology employs a longitudinal, multi-method
approach combining a proprietary dataset of granular audit process metrics—including
partner-client meeting logs, workpaper review depth indices, and time allocation analytics—with experimental simulations of auditor judgment under varying tenure and pressure
scenarios. We move beyond traditional outcome-based proxies for quality (e.g., discretionary
accruals) to examine the integrity of the underlying audit process itself. The results reveal a
nuanced landscape: financial reporting quality, measured by process rigor and error detection
rates, improves significantly during the maturation phase due to accumulated client-specific
knowledge and procedural efficiency, but plateaus and shows signs of procedural drift in
the elongated phase. Conversely, perceived and actual threats to independence exhibit a
different trajectory, remaining low in the nascent phase, increasing subtly in the maturation
phase as economic bonds and social familiarity deepen, and becoming most pronounced in
the elongated phase, often in subtle, non-confrontational forms of compromise. Crucially,
the study identifies that the optimal tenure window for maximizing the quality-independence
equilibrium is narrower than mandated rotation policies suggest and is highly contingent on
specific governance moderators, such as audit committee diligence and the use of mandatory partner rotation within the firm. This research contributes a dynamic, phase-based
framework that disaggregates audit tenure effects, offering regulators and firms a more sophisticated evidence base for policy design beyond the blunt instrument of mandatory firm
rotation.