Recent amendments to Auditing Standard (AS) 3101 require disclosure of the initial year of the auditor‐client relationship in the audit report. As the standard was being discussed, auditors, clients, and some PCAOB members expressed reservations about the necessity of tenure disclosures and were particularly concerned about disclosing tenure in the audit report. Our purpose is to investigate whether the tenure disclosures mandated by AS 3101 are associated with changes in stakeholder behavior. We predict and find that after the implementation date, ratification votes against the auditor and the probability of subsequent auditor dismissal increase for long‐tenured versus short‐tenured auditors. Results from a path analysis further suggest that the relative increase in dismissal for long‐tenured auditors appears to be influenced directly through tenure disclosures and indirectly through ratification voting. We also predict and find that negotiating power decreases for long‐tenured auditors 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. Overall, our study suggests that mandatory disclosure of auditor tenure in the audit report significantly affects stakeholder behavior. The PCAOB should consider our findings carefully as they evaluate whether AS 3101 is achieving its intended purpose.

Using proprietary data from a global accounting firm, we investigate the determinants of auditors' interim effort as well as the impact of interim effort on audit quality, client disclosure timeliness, audit hours, and audit fees. Public statements from accounting firms and regulators suggest various benefits from accelerating auditor effort, but these claims remain largely untested. We find that interim effort is higher for large, complex clients that require integrated audits of both financial statements and internal control over financial reporting. With respect to consequences, we find that allocating relatively more work to the interim period is associated with a reduced likelihood of late 10‐K filings, decreased total audit hours, and higher fees. Although increasing interim period effort is not, on average, associated with a reduced likelihood of misstatement, we do find that current period material weaknesses are less likely with greater interim work. Thus, greater interim effort appears to facilitate the remediation of internal control deficiencies before year‐end. We also show that the benefits of increased interim period effort allocation are much stronger—including improved audit quality—when manager and partner interim involvement is high. Overall, our study provides important new insights on audit production and highlights benefits of reduced hours for auditors, earlier identification of control deficiencies for clients, and more timely financial reports for investors.

In this paper, we investigate how auditors respond to shareholder activism against their clients. Our study is important because activism may be viewed by auditors as a source of increased engagement risk, thereby impacting audit outcomes. The potential relationship between shareholder activism and audit outcomes leads us to predict that activism targets will pay higher audit fees and also will be more likely to receive adverse internal control opinions (ICOs) and first‐time going concern opinions (GCOs). Our results, which support all three predictions, suggest that the public scrutiny associated with activism campaigns heightens auditors' concerns about reputational damage and litigation risk. Consistent with this notion, we find that activism targets are more likely to experience accounting‐related lawsuits. We also find that the increased likelihood of adverse ICOs documented in our baseline tests reflects higher‐quality reporting rather than increased auditor conservatism. Overall, our findings suggest that activism campaigns spur auditor diligence while also increasing the possibility of negative outcomes that may not be fully anticipated by activist investors.

Our study is motivated by the theory of credence goods in the auditing setting. We propose that audit committee accounting expertise should reduce information asymmetries between the auditor and the client, thereby limiting auditors' ability to over-audit and under-audit. Consistent with this notion, our results indicate that when audit committees have accounting expertise, clients (1) pay lower fees when changes in standards decrease required audit effort; (2) pay a smaller fee premium in the presence of remediated material weaknesses; and (3) have a reduced likelihood of restatement when audit market competition is high. Our findings in the under-auditing setting generally are strongest among non-Big 4 engagements, consistent with non-Big 4 auditors being less sensitive to market-wide disciplining mechanisms such as reputation, legal liability, and professional regulation. We also provide evidence that the nature of audit committee members' accounting expertise differentially impacts the committee's ability to curtail over- and under-auditing.