Prior to the Sarbanes–Oxley Act of 2002, audit partners experienced economic pressure to grow revenue from the sale of nonaudit services to their audit clients. To an auditor who is highly rewarded for revenue generation and growth, nonaudit services may represent a particularly strengthened economic bond with the client. Prior research shows that, in general, nonaudit service fees received in the current period do not impair audit quality. We examine a different setting. We propose that auditor independence can become impaired, and audit quality compromised, when clients that currently purchase relatively low amounts of nonaudit services, increase their purchases of nonaudit services from the auditor in the subsequent period. We test our prediction in the context of earnings management as a proxy for audit quality, measured by (a) performance‐adjusted discretionary accruals and (b) classification shifting of core expenses. Our results indicate that prior to the Sarbanes‐Oxley Act, rewards to the auditor in the form of future additional nonaudit service fees from current‐year high fee‐growth‐opportunity clients adversely affects audit quality. This effect is particularly strong among companies with powerful incentives to manage earnings. Our findings indicate that regulators should consider the multiperiod nature of the client–auditor relationship when contemplating policies that restrict nonaudit services, as well as the overall environment in which audit partners operate. This might include partner compensation arrangements that put pressure on audit partners to focus on increasing revenue at the expense of audit quality.

Theory from organizations and economics research posits that in an inter‐organizational relationship, both parties invest in relationship‐specific knowledge, which in turn facilitates the effectiveness of the relationship while strengthening the attachment between the parties. In complex settings where there are more opportunities for knowledge creation, the investments will be larger and the attachment stronger. Because banks are complex institutions that present unique challenges to auditors, we suggest that effective audits critically depend on the accumulation of significant investments in client‐specific expertise through a long association with the client. We find a positive association between audit firm tenure and financial reporting quality, and this association is particularly strong in banks that are more complex. Also, contrary to recent research we find that benefits of audit firm tenure for complex banks accrue even for long tenure and are not limited to medium tenure. Our findings largely support the notion that a long relationship with the client reflects the underlying demand for expertise, which is critical for high‐quality audits of complex organizations. Imposing short‐term limits on audit firms would adversely affect the investments in client‐specific expertise especially in the cases where this expertise is needed the most. Our findings do not support calls for mandatory audit firm rotation for large complex institutions.

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.

The SEC requires equity crowdfunding (ECF) companies to provide assured financial statements. Assurance can be provided with certification by management or an audit or review by an independent accountant. We utilize the ECF setting to examine whether voluntary assurance facilitates capital formation. We find that companies that provide either reviewed or audited financial statements during a capital campaign are marginally more likely to raise their target capital. They also raise more funds and attract more investors relative to companies that only provide management-certified financial statements. However, relative to reviews, audits are not associated with a greater likelihood of success in an ECF offering other than attracting more investors. Finally, we find that assurance is indirectly associated with a company's post-ECF survival and its ability to raise future capital. This suggests that assurance at the time of ECF has implications for a company's success beyond ECF. Data Availability: Data are available from the public sources cited in the text.

Social network analysis (SNA) examines whether interactions between individuals, teams, and organizations result in network structures and patterns that can explain important outcomes, including firm performance, management reporting behaviors, investor beliefs, and audit outcomes. This paper reviews the growing body of work on SNA in accounting and finance research, focusing on 162 articles published between 2000 and 2021, and offers a roadmap that may help move this literature forward. Our survey summarizes the elements of SNA, organizes this literature within a theoretical framework, and provides a thematic discussion of the context and contribution of the selected studies. We also discuss opportunities and challenges for future research. Finally, we include an empirical illustration of the key concepts and tools of SNA. We believe that SNA will continue to offer an interesting avenue for conducting high‐impact and cross‐disciplinary research in accounting and finance.