The Effects of Audit Tenure Disclosures on Investor Judgements

Abstract

Disclosures of audit firm tenure have been mandated in some countries and are being considered in others. We investigate whether and how the form of firm tenure disclosures and the inclusion of partner tenure combine to affect investor judgements. We find that investors perceive the auditor as more independent and their investment as more attractive when firm tenure is disclosed in brief rather than detailed form, and this effect is stronger when partner tenure is disclosed along with firm tenure than when it is not. A mediation analysis shows that perceived auditor independence explains the joint effect of firm tenure disclosure form and partner tenure disclosures on the investment judgement. Audit regulators should consider our findings when assessing whether and how auditor tenure disclosures should be mandated and whether it is beneficial to standardize disclosures.