An examination of the influence of mutual CFOaudit firm tenure on audit quality

J Account Public Policy xxx (xxxx) xxx Contents lists available at ScienceDirect J Account Public Policy journal homepage: www.elsevier.com/locate/jaccpubpol An examination of the influence of mutual CFO/audit firm tenure on audit quality Jeff L Payne a,⇑, Russell Williamson b a b University of Kentucky, Gatton College of Business and Economics, Von Allmen School of Accountancy, 423K GBE, Lexington, KY 40506, United States University of Louisville, College of Business, RW 273, Louisville, KY 40292, United States a r t i c l e i n f o Article history: Available online xxxx a b s t r a c t This study examines whether the extent of professional relationships between an audit firm and their client’s CFO influences audit quality If regulators’ concerns that the relationship that develops over time between an audit firm and their client’s CFO impairs auditor judgment are justified, then we should observe a negative relationship between the length of audit firm’s tenure with their client’s CFO and audit quality The results suggest that mutual audit firm-CFO tenure is associated with lower audit quality measured by the magnitude of discretionary accruals, the reduced incidence of issuance of going-concern audit opinions for distressed companies, and an increased likelihood of the receipt of an Accounting and Auditing Enforcement Release (AAER) from the US Securities and Exchange Commission (SEC) These affects are concentrated in a subsample of firms with higher levels of corporate governance concerns These findings have implications for policies related to audit firm rotation Specifically, the results suggest that regulators need to consider other relationships underlying audit firm tenure, such as the relationships that form between audit firm and client personnel, when evaluating audit firm rotation policies Ó 2021 Elsevier Inc All rights reserved ‘‘Independence, both historically and philosophically, is the foundation of the public accounting profession and upon its maintenance depends the profession’s strength and its stature” (Carey, 1970; 182).” Introduction The purpose of this study is to explore whether the extent of personal / professional relationships that develop over time – measured by the consecutive number of years that an audit firm and their client’s CFO work together – affect audit quality This research is motivated by a response from the Center for Audit Quality (CAQ) to the Public Company Accounting Oversight Board’s request for public comment on auditor independence and audit firm rotations stating: ‘‘We [CAQ] also note that there are many existing factors that already limit the tenure of the engagement team and company management In addition to the natural turnover within the audit engagement team, due to staff attrition and promotion, current independence requirements require lead audit partners and engagement quality control review partners to rotate every five years Certain other partners involved with a company’s audit must be rotated after seven years ⇑ Corresponding author E-mail addresses: jeff.payne@uky.edu (J.L Payne), russell.williamson@louisville.edu (R Williamson) https://doi.org/10.1016/j.jaccpubpol.2021.106825 0278-4254/Ó 2021 Elsevier Inc All rights reserved Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J.L Payne and R Williamson J Account Public Policy xxx (xxxx) xxx Moreover, there is a similar natural turnover of public company CFOs As detailed in a Crist/Kolder Associates 2011 study on executive management volatility, from January 1, 1995 through July 31, 2011, the average CFO tenure within the S&P 500 was 5.1 years We believe that the factors described above already limit the length of the relationships between the engagement team and company management and stifle any opportunity for ’coziness’ between the auditor and the company’s senior management team [Emphasis added]” (CAQ 2011, 9) This research empirically examines this statement to ascertain its validity and inform discussions regarding mandating audit firm rotation We investigate mutual audit firm / CFO tenure as another setting to investigate potential independence impairment In a report released in August of 2011, the PCAOB expressed concern that inspection reports continue to indicate a failure of auditors to exercise appropriate levels of objectivity and professional skepticism during the audit of their clients’ financial statements (PCAOB 2011a) Although the PCAOB cannot document that this loss of objectivity is directly related to long audit firm tenure, questions nevertheless persist (PCAOB 2011a) Academic investigation likewise produces inconsistent results regarding the effects of long audit firm tenure on professional skepticism and ultimately on audit quality Although a few recent studies report decreased audit quality, most research finds audit quality improves as audit firm tenure increases The PCAOB and the accounting profession can be informed by additional investigation of this issue An important aspect of the auditor-client relationship is the professional interaction between the auditing firm and their client’s personnel, specifically the CFO CFOs are directly responsible for the company’s financial statements (Gibbins et al 2007), negotiate with the audit partner regarding the fair presentation of reported balances (Gibbins et al 2005), and normally have compensation and equity incentives based on operating results Because of their role in financial reporting, CFOs and auditors interact frequently Further, the CFO has more direct communication with the audit committee than any other party, and the CFO participates in the setting of the audit committee agenda 75% of the time This gives the CFO the ability to broker knowledge between the auditor and the audit committee, and the ability to engage in negotiations with the auditor before information reaches the audit committee The Metcalf Report notes, ‘‘long association between a corporation and an accounting firm may lead to such a close identification of the accounting firm with the interests of its client’s management that truly independent action by the accounting firm becomes difficult.” (U.S Congress 1976, 19) In addition, out of concern of relationships forming between audit firm personnel and client’s personnel the Cohen commission stated, ‘‘many of the asserted advantages of rotation can be achieved if the public accounting firm systematically rotates the personnel assigned to the engagement.” (AICPA 1978, xxx) Further, at a meeting of the PCAOB’s Investor Advisory Group (IAG), some members of the IAG advocated mandatory firm rotation stating that ‘‘key to concern over independence was the level of ‘coziness’ the firm had with the management of the company being audited.” (PCAOB 2011b, 6) On the other hand, the mutual trust that develops over time can improve inter-organizational communication, and in turn benefit the financial reporting process If the negative aspects associated with long audit firm tenure dominate and are due to the ‘‘coziness” with client management then a frequent break-up in this relationship (either due to CFO turnover or audit firm rotation) should strengthen auditor independence and skepticism The average mutual tenure between and audit firm and their client’s CFO tenure for U.S public companies of approximately three years likely creates a setting where sufficient time is not available for strong relationships and potential biases or trust to form The ‘‘break” in the relationship between audit firm and CFO may reduce the influence that long audit firm tenure may have on audit quality In the end, it could be that such breaks, if frequent enough, can provide a reasonable alternative to mandatory audit firm rotation Prior research investigating the influence of audit firm tenure on audit quality has not considered that underlying the audit firm’s tenure is a subset of important relationships that form and break between client and audit firm personnel We single out one set among many relationships: the tenure of professional relationships between a client CFO and their audit firm By analyzing this relationship and its effect on audit quality our investigation extends the understanding of the influence of audit firm tenure on audit quality by identifying the influence of these relationships Specifically, we investigate audit quality measured as 1) the absolute value of discretionary accruals, and separately the income increasing and income decreasing discretionary accruals present in reported financial statements, 2) the issuance of a going-concern opinion for distressed companies, and 3) the receipt of an Accounting and Auditing Enforcement Release (AAER) from the US Securities and Exchange Commission (SEC) For each examination, we use the complete time period where data is available The results indicate that a lengthening of the mutual tenure between an audit firm and their client’s CFO leads to higher levels of discretionary accruals, measured using absolute total and income increasing accruals.1 There is also a decrease in the issuance of going concern opinions for distressed companies and an increase in AAERs for clients with elevated levels of mutual tenure Additionally, when we split our samples between high and low quality corporate governance firms we find that, generally, mutual tenure is associated with reduced audit quality in firms with higher numbers of corporate governance concerns than strengths We provide a additional tests investigating the influence of mutual tenure on the presence of material weaknesses in the internal control over financial reporting (ICFR) report and additional untabulated analyses examining the influence of short We analyze both absolute abnormal accruals and subsamples of income-increasing and income-decreasing abnormal accruals because Hribar and Nichols (2007) demonstrate that the analysis of absolute accruals may be problematic due to a correlated omitted variable problem Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J Account Public Policy xxx (xxxx) xxx J.L Payne and R Williamson periods of mutual tenure, the presence of financial restatements from fraud, and differential affects for companies in high risk industries The results of these tests generally support the implications of our main results, that mutual tenure negatively influences audit quality and suggest that a significant portion of audit quality concerns arising from auditor tenure are a function of the mutual tenure between the CFO and the audit firm and that this effect is concentrated withing firms with lower quality corporate governance This paper makes an important contribution to the literature By examining the relationships that develop between audit firms and their client’s CFOs, we contribute new insights to the debate on audit firm rotation We contribute to the literature by examining the bonding relationship between auditor and CFO We suggest this is an important modification to prior research that more directly examines the role of relevant auditor tenure The PCAOB is concerned that audit firms that identify with their clients because of a long association can compromise audit quality The solution prescribed is to require mandatory audit firm rotation to ‘‘break” this relationship However, the extant research suggests that perhaps it is not the long audit firm tenure per se that might lead to lower audit quality but the underlying relationships between audit firm and client personnel that can give rise to professional or even personal ties which in turn can contribute to lower auditor independence We examine such relationships and find that increasing audit firm tenure improves audit quality, but the length of the relationship between audit firm and the client CFO weakens it Perhaps this suggests a more sensible approach to deriving the perceived benefits from mandatory audit firm rotation, targeting those cases where the audit firm has formed and maintains long-term ties to client personnel Thus, an audit firm’s tenure with their client’s CFO is an important relationship to consider when evaluating audit firm tenure effects on audit quality The remainder of the paper is organized as follows Section describes the background research and states the hypothesis Section describes the method, analyses, discusses limitations, provides supplemental analysis, and Section concludes the paper The debate surrounding audit firm rotation and empirical evidence 2.1 Audit firm rotation Requiring audit firms to rotate from clients is a topic of current (PCAOB 2011a, House of Lords 2011, European Commission, 2010, 2011, 2013)2 and past (AICPA 1978, GAO 2003) debate Recently, the US House of Representatives passed a bipartisan bill, H R 1564 that prohibits the Public Company Accounting Oversight Board (PCAOB) from requiring mandatory audit firm rotation (US Congress 2013).3 Proponents of audit firm rotation argue it provides a ‘‘fresh look” at the client’s control environment and financial reporting decisions and lessens both the economic and personal relationships between the audit firm and the client (PCAOB 2011a) The PCAOB is motivated by its own inspections of audit firms that indicate a failure of audit firms to exercise appropriate levels of objectivity and skepticism However, the PCAOB has not been able to establish that loss of objectivity and skepticism is due to a long audit firm tenure (PCAOB 2011a) Those that oppose mandatory audit firm rotation argue that it sacrifices the formation of knowledge and expertise (as discussed in PCAOB Auditing Standard #5) that auditors develop during the performance of consecutive audits and that it can increase audit production cost (US Congress 2013) From the PCAOB call for comments on mandatory audit firm rotation, 95% of respondents opposed its implementation primarily on the grounds that rotation would negatively affect both quality and efficiency of an audit (Cohn 2012; Hanson 2013) Extant research on this debate provides some evidence that does not support the mandatory rotation argument; however, the evidence is not consistent (PCAOB 2011a) Gerakos and Syverson (2013) indicate a significant economic cost from mandatory rotation.4 Reid and Carcello (2017) find a negative market reaction to events that potentially increased the likelihood of regulations requiring mandatory rotation, especially for companies with longer audit firm tenure Fiolleau et al (2013) note some additional potential consequences to mandatory audit firm rotation First, it would provide management with additional opportunities during auditor change years to seek a desired financial reporting outcome from other bidding audit firms Therefore, required rotation might actually escalate management’s ability to influence auditors Second, required rotation allows management to change auditors without having to disclose disagreements or problems If disclosures related to auditor rotation are useful to financial statement users (Hennes et al 2014), required rotation would remove this information for auditor changes that occur in accordance with the regulation Opponents recommend that the PCAOB not require mandatory audit In the revised version of the 8th Directive on Statutory Audits of Single Annual and Consolidated Financial Statements (European Union 2006), the European Union (EU) requires that by the end of June 2008, all twenty-seven-member states of the European Union enact the requirements of the revised 8th Directive into national law One important detail of the Directive is rotation of the key audit partner Every member state is given discretion regarding the length of the rotation period The bill passed with a vote of 321 for, 62 against The bill did not move forward in the US Senate They estimate[d] consumer surplus losses at approximately $2.4–3.6 billion (total audit fees in 2010 were $11 billion) if rotation were required after ten years, $4.3–5.5 billion for a four-year rotation policy Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J.L Payne and R Williamson J Account Public Policy xxx (xxxx) xxx firm rotation until evidence that points to a relation between audit firm tenure and inspection report findings is documented (Anton and Melancon 2011)5 and the cost/benefit relationship is better understood (GAO 2003).6 An outcome of this continued discussion was addressed in 2017 when the PCAOB issued AS 3101: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (PCAOB 2017) A part of this new standard requires auditors to indicate the first year they were engaged by the audited company in the audit report While not requiring audit firm rotation, this does provide audit tenure information to financial statement users This portion of the standard was not adopted without controversy Investors suggested this information would be useful in the ratification of audit firms, but others suggested that existing research did not find a consistent relationship between audit tenure and audit quality and were concerned that the difficulty at determining the start date of some clients, for example due to audit firm mergers, would reduce the value of the information (SEC 2017) Board member Jeanette Franzel voted against the provision based on concerns that investors would infer an audit quality/tenure connection that might not exist (Hirschmann 2017) In making the final decision the Board concluded that the provision of the information is an efficient way to inform retail investors without their need to search elsewhere, often at a cost, for this information 2.2 Audit firm tenure and audit quality Existing research examines the association between audit firm tenure and various proxies for audit/financial reporting quality including discretionary or unexpected accruals, reporting earnings to meet or beat earnings targets, the cost of debt, investor response to reported earnings, financial statement restatements, and others Johnson et al (2002), and Gul et al (2009) find that accrual quality is unaffected by audit firm tenure Stanley and DeZoort (2007) find a negative relation between the length of the auditor–client relationship and the likelihood of restatement Myers et al (2003) and Blouin et al (2007) find that accrual quality increases in audit firm tenure Li (2010) documents a positive association between the conservatism in reported earnings and the length of the auditor–client relationship In their investigation of audit partner and audit firm tenure using international data, Chen et al (2008) also not find a negative effect of tenure on earnings quality Using data from internal audit firm inspections, Bell et al (2015) document a positive relationship between tenure and audit quality among SEC clients Davis et al (2009) examine audit quality by investigating how audit firm tenure influences management’s ability to use discretionary accruals to report earnings that meet or beat analysts’ earnings forecast They find longer audit firm tenure reduces the use of discretionary accruals to meet or beat analysts forecast, an indication of improved audit quality However, they find a turning point for audit tenure of greater than 15 years, where tenure leads to a reduction of audit quality The non-linear effect of audit firm tenure on audit quality is confirmed by Brooks et al (2016) Singer and Zhang (2018) find that SOX has mitigated, but not eliminated the negative effects of long-term tenure that they find leads to less timely discovery and adjustment of misstatements They also find the magnitude of the misstatements are positively correlated with increasing audit firm tenure Yen et al (2018) investigate a unique setting to the literature and find that audit firms with more experience with a client is better able to assess information security breech risks Chu et al (2018) find that longer audit firm tenure for clients with increased litigation risk reduces audit quality Investigating short tenure relationships, results using various proxies for audit quality consistently indicate that quality is diminished during the first years of an audit engagement (AICPA 1992; Geiger and Raghunandan 2002; Carcello and Nagy 2004; Johnson et al 2002; Davis et al 2009; Bell et al 2015) A goal of mandatory audit firm rotation is to reduce the length of the relationship between the audit firm and client leading to increased professional skepticism and improved audit quality The inconsistent results from existing literature leave the profession and regulators with little information to support requiring mandatory audit firm rotation However, some research does find settings where long audit firm tenure reduces audit quality Importantly, the consistent finding that audit quality is diminished in the initial years of an audit/client relationship supports opponents concerns that mandatory audit firm rotation leads to reduced audit quality Importantly, Gipper et al (2018) find little support for the potential ‘‘fresh look” benefits of mandatory five-year partner rotations in a new study using proprietary PCAOB data from audit firm inspections 2.3 Chief financial officers Extant literature investigating the influence of audit firm tenure on audit quality overlooks a critical participant in the relationship between the audit firm and their client, the client’s chief financial officer (CFO).7 CFO’s typically have primary Since PCAOB Inspection reports not reveal the clients where deficiencies occur, this analysis cannot be performed with publicly available data KPMG notes that countries such a Singapore, South Korea, Argentina, Brazil, Spain and Canada have implemented mandatory audit firm rotation (MAFR) and subsequently either partially or fully withdrew it.Additionally, countries such as Australia, Hong Kong, Japan, Malaysia, Mexico, New Zealand, Russia, Sri Lanka, Switzerland, Thailand and the USA have considered MAFR and decided against the adoption of MAFR (KPMG 2017) Fiolleau et al (2013) find that audit firms actively align attributes of their key personnel with the client’s CFO early in the auditing bidding process Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J Account Public Policy xxx (xxxx) xxx J.L Payne and R Williamson responsibility for decisions that influence their firm’s financial reporting process and related financial reports (Ge et al 2011; Menon and Williams, 2008).8,9 CFOs participate in auditor–client negotiations related to accounting disputes (Geiger and North 2006; Gibbins et al 2005) These negotiations take place between the CFO and the auditors throughout the audit process and before the financial statements and audit results are communicated to the audit committee Likewise, the CFO has incentives to maximize their compensation by not disappointing investors with unsatisfactory financial reports (e.g., missing analysts forecast) (Jiang et al 2010)10 and face a greater likelihood of dismissal when reportable events are made public (Menon and Williams 2008) or company performance decreases (Coughlan and Schmidt, 1985; Gilson, 1989; Beneish, 1999; Mian 2001, Burks 2010) The Independence Standards Board (ISB 2000) report expresses concerns that the relationship between the audit firm and client personnel can lead to biased decisions, with the auditor potentially accepting the preferences of the client over the preferences of the audit firm And since the CFO’s influence on the financial reporting process puts them in frequent ongoing contact with the auditor (Antle and Nalebuff, 1991) and the CFO plays a key role in audit committee communication and organization (Beasley et al 2009), the CFO-auditor relationship, consequently, has the greatest potential to affect audit quality among the various levels of management inside the audit client Because of the important roles the CFO and audit firm play in the financial reporting process, we focus primarily on the audit firm - CFO relationship and how it influences audit quality Given the agency and the mutual trust perspectives on the mutual role of audit firm and CFO, it is not immediately clear as to how a long association between the audit firm and CFO will influence financial reporting and audit decisions On the one hand, from an agency perspective, CFOs have incentives to manage earnings and exert some form of pressure (economic or social) on auditors, potentially resulting in biased reporting and low audit quality On the other hand, the mutual trust perspective suggests the social interactions that develop with time can enhance the information flows between the two parties in turn improving the quality of auditing (Dees and Cramton, 1991) In summary, prior literature provides mixed evidence on the effect of audit firm tenure on audit quality These inconsistent findings suggest the need to carefully examine the underlying relationships between audit firm and their client’s personnel to identify conditions where long audit firm tenure might be problematic Based on the concerns documented in the extant literature and by the regulatory agencies regarding the detrimental aspect of these personal relationships we hypothesize: Hypothesis: There is a negative relationship between mutual audit firm – client CFO tenure and audit quality 2.4 Mutual tenure and corporate governance Where prior research on auditor tenure has found auditor tenure to be associated with measures of reporting quality such as accounting conservatism (Jenkins and Velury, 2008) a deeper look into this relationship shows that the association with higher quality information is limited to sub-sets of the population and that negative associations exist for firms with fewer resources or firms with weaker external monitoring (Li, 2010) These concerns regarding long auditor tenure are often presented as independence concerns, however, Stanley and DeZoort (2007) find that non-audit fees have no significant relationship with the likelihood of restatement for long tenure auditors, suggestions independence may not be impaired Further, Kaplan and Mauldin (2008) find within an experimental setting that independence judgements center more upon the quality of the firm’s governance mechanisms than on the auditors tenure.11 Since, auditor selection and rotation is a function of corporate governance and corporate governance has been shown to affect the quality, transparency, and frequency of corporate disclosures (Eng and Mak, 2003; Wang and Hussainey, 2013; Haniffa and Cooke, 2005; Kelton and Yang, 2008), we ask the open research question: Research Question: Will mutual tenure between the Auditor and the CFO have differential effects for high quality corporate governance firms as opposed to low quality corporate governance firms? Models and empirical results 3.1 Descriptive statistics All model variables are defined in Table Panel A presents the variable definitions, Panel B outlines our sample construction for each test, Panel C provides the descriptive statistics and Panel D the Pearson correlations In our sample, the average audit firm tenure is 10.58 years, the average CFO tenure is 3.80 years, and the average mutual tenure is 3.34 years CFO’s have unique characteristics when compared to CEOs (Crist/Kolder Associates 2017) CFO’s employment relationship turns over more frequently and very few CFOs (6%) become future CEOs Interestingly, only 25% of sitting CFOs at the time of their study had accounting degrees and 32% of these have work experience in a larger international accounting firm (commonly denoted the Big-N) Krishnan and Wang (2015) examine the relation between managerial ability, i.e., ability in transforming corporate resources to revenues, and audit fees and a going concern opinion and find that incremental to firm-level attributes, both audit fees and the likelihood of issuing a going concern opinion are decreasing in managerial ability 10 They report ‘‘ that the magnitude of accruals and the likelihood of beating analyst forecasts are more sensitive to CFO equity incentives than to those of the CEO” (2010, p 513) 11 Specifically that non-professional investors believe that auditors will be more independent under a strong audit committee regardless of auditor tenure Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 Definition Dependent Variables ABSDA Following Dechow, Sloan, and Sweeney (1995), and Kothari, Leone, and Wasley (2005), the estimates of k1 ; k2 and k3 are those obtained from the original Jones model where total accrual is earnings before extraordinary items and discontinued operations minus the operating cash flows (IB-OANCF) DSALEt is the change of total revenue from t À to t year, DREC t is the change of net receivables from t À to t year, and PPE is the property, plant and equipment, ROA is the net income (NI) divided by total assets (AT) (Compustat) Total Accrualt ẳ k1 1=AT t1 ị ỵ k2 DSALEt DREC t ị ỵ k3 PPEt ịỵk4 ROAt ị ỵ et AT t1 GC Equal to one if the firm received a going concern opinion in the current year, otherwise (Audit Analytics) J.L Payne and R Williamson Variables AAER Equal to one if the firm was included in an Accounting and Auditing Enforcement Release (AAER) from the US Securities and Exchange Commission (SEC) Main Independent Variables AUDTEN = the number of years the auditor has been retained by the client beginning in 1980 (Compustat) CFOTEN = the number of years the client’s employee has been the chief financial officer (Execucomp and Audit Analytics) MUTUAL = the number of years with the same audit firm and client’s chief financial officer Control Variables AGE = Natural logarithm of the number of years that the client firm has been listed on COMPUSTAT Source: Compustat ASSETS =the natural log of total assets (AT), (Compustat) BIGN =a dummy variable that equals one if the company uses a big-N audit firm; zero otherwise.19 (Compustat) CASHFLOW = operating cash flow (OANCF) scaled by total assets (AT), (Compustat) FIN =a dummy variable indicating mergers or new financing and equals one if COMPUSTAT footnote SALE_FN equals ‘‘AB”, or the percentage change in long-term debt (DLTT) is greater or equal to 20 percent, or the percentage change in common shares outstanding (CSHO), adjusted for stock splits, is greater or equal to 10 percent; zero otherwise, LCA =the absolute value of lagged current accruals, and LEV = total liabilities (AT – CEQ) scaled by lagged total assets, (Compustat) LITIG = a dummy variable equal to one if the company-year is in a high litigation industry, defined as SIC codes: 2833–2836, 3570–3577, 3600–3674, 522–5961, 7370–7474; zero otherwise, (Compustat) LOSS = a dummy variable that equals one if net income (NI) is less than zero; zero otherwise (Compustat) MB = market-to-book ratio (MKVALT/CEQ), (Compustat) D2D = the distance-to-default metric is a default risk score based on functional for of the Merton model and described in Bharath and Shumway (2008) MV = the natural log of the market value of equity (MKVALT) at fiscal year-end, (Compustat) NEG EQUITY an indicator variable equals if the client firm has a negative book value of equity (Compustat) = ROA =net income before extraordinary items scaled by lagged assets (Compustat) SOX = a dummy variable that equals one for years after 2004 Panel B: Samples Construction To construct our analysis samples, we start with observations from non-financial services industries listed in Compustat from 1994 to 2015: Next, we utilize Execucomp to calculate the tenure of the firm CFO and utilize officer information from Audit Analytics to supplement our sample when firms are missing from Execucomp Joining this data set to our main Compustat sample reduces our sample by: Next, we calculate our variables; reducing our sample for firm year observations with missing data for the calculation of control variables: Observations available for use in ABSDA analysis (Table 2): We then join Going Concern data from Audit Analytics for our dependent variable of interest and both daily and monthly returns data from CRSP to calculate additional control variables; reducing our sample by: We then retain only firms with negative cashflow or negative earnings as distressed firms; reducing our sample by: Observations available for use in Going Concern analysis (Table 3): Starting with our ABSDA Sample: Next, to maintain sample consistency we utilize our ABDSA sample and join data on Accounting and Auditing Enforcement Releases (AAERs) from the SEC and data for additional related control variables (ASSETS, ROA, MERGER); reducing our sample by: Observations available for use in AAER analysis (Table 4): 175,227 (95,495) (42,600) 37,132 (9464) (21,165) 6503 37,132 (5556) 31,576 J Account Public Policy xxx (xxxx) xxx Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 Table Panel A: Variable Definitions N Mean SD Min 25% Median 75% Max 37,132 37,132 37,132 37,132 37,132 37,132 37,132 37,132 37,132 37,132 37,132 37,132 37,132 37,132 31,576 31,576 31,576 31,576 6503 6503 6503 0.10 10.58 3.80 3.34 0.05 0.62 0.34 2.86 6.45 0.31 0.27 0.12 0.79 0.73 0.01 6.40 À0.49 0.06 0.08 0.29 20.30 0.14 7.67 3.05 2.71 0.25 0.73 0.47 6.22 2.18 0.46 0.45 0.49 0.41 0.44 0.09 2.17 19.19 0.23 0.27 0.45 13.99 0.00 1.00 1.00 1.00 À3.00 0.02 0.00 À59.28 0.00 0.00 0.00 0.00 0.00 0.00 0.00 À6.91 À2218 0.00 0.00 0.00 2.00 0.02 5.00 2.00 1.00 0.03 0.35 0.00 1.22 5.15 0.00 0.00 0.02 1.00 0.00 0.00 5.21 À0.02 0.00 0.00 0.00 10.00 0.06 9.00 3.00 2.00 0.09 0.53 0.00 2.04 6.60 0.00 0.00 0.04 1.00 1.00 0.00 6.52 0.04 0.00 0.00 0.00 16.00 0.12 15.00 5.00 4.00 0.15 0.70 1.00 3.52 7.90 1.00 1.00 0.08 1.00 1.00 0.00 7.79 0.08 0.00 0.00 1.00 25.00 1.00 36.00 24.00 24.00 0.54 13.67 1.00 55.98 13.35 1.00 1.00 9.61 1.00 1.00 1.00 13.59 26.06 1.00 1.00 1.00 65.00 J.L Payne and R Williamson ABSDA AUDTEN CFOTEN MUTUAL CASHFLOW LEV LITIG MB MV LOSS FIN LCA BIGN SOX AAER ASSETS ROA NEG_EQUITY GC D2D AGE Panel D Pearson’s pairwise correlation coefficients for the full sample of observations ABSDA AUDTEN CFOTEN MUTUAL CASHFLOW LEV LITIG MB MV LOSS FIN LCA BIGN SOX AAER ASSETS ROA NEG_EQUITY GC D2D AGE 10 11 12 13 14 15 16 17 18 19 20 21 10 11 12 13 14 15 16 17 18 19 20 1.00 À0.11 À0.08 À0.08 À0.36 0.22 0.07 0.02 À0.30 0.28 0.08 0.25 À0.28 0.16 À0.01 À0.37 À0.05 0.20 0.31 0.02 À0.19 1.00 0.22 0.38 0.12 À0.01 À0.07 0.02 0.30 À0.16 À0.04 À0.08 0.28 0.05 À0.01 0.30 0.00 À0.05 À0.11 À0.08 0.44 1.00 0.88 0.09 À0.04 À0.05 À0.01 0.17 À0.13 À0.05 À0.07 0.08 0.12 À0.02 0.17 0.01 À0.06 À0.10 À0.06 0.22 1.00 0.10 À0.05 À0.04 0.00 0.20 À0.14 À0.05 À0.09 0.12 0.12 À0.02 0.20 0.01 À0.06 À0.11 À0.06 0.22 1.00 À0.41 À0.06 0.06 0.40 À0.46 À0.12 À0.43 0.32 À0.14 0.01 0.46 0.12 À0.27 À0.47 À0.11 0.14 1.00 À0.06 À0.13 À0.22 0.19 0.08 0.36 À0.16 0.06 À0.01 À0.25 À0.27 0.51 0.45 0.36 0.00 1.00 0.07 À0.04 0.10 À0.03 0.03 À0.03 0.04 0.02 À0.14 0.01 0.00 À0.01 À0.11 À0.21 1.00 0.16 À0.06 À0.01 À0.03 0.04 À0.02 0.02 0.03 0.03 À0.32 À0.08 À0.12 À0.02 1.00 À0.48 À0.05 À0.23 0.58 À0.15 0.04 0.88 0.06 À0.25 À0.43 À0.26 0.38 1.00 0.10 0.18 À0.29 0.14 À0.01 À0.42 À0.04 0.23 0.33 0.27 À0.23 1.00 0.05 À0.06 À0.03 0.02 À0.03 À0.02 0.04 0.07 0.03 À0.06 1.00 À0.23 0.07 À0.01 À0.32 À0.12 0.20 0.34 0.04 À0.13 1.00 À0.28 0.03 0.60 0.05 À0.15 À0.32 À0.05 0.20 1.00 À0.07 À0.15 À0.02 0.07 0.08 À0.01 À0.02 1.00 0.03 0.00 À0.02 À0.02 À0.01 À0.02 1.00 0.12 À0.23 À0.44 0.02 0.45 1.00 À0.08 À0.10 À0.15 0.02 1.00 0.40 0.19 À0.06 1.00 0.16 À0.15 1.00 À0.02 Dummy variables are included to control for year and industry fixed effects Coefficients in bold and italics indicate significance at the five percent level All variables are formally defined in Appendix B 19 Big-N firms are Arthur Andersen, Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers J Account Public Policy xxx (xxxx) xxx Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 Panel C: Descriptive statistics J.L Payne and R Williamson J Account Public Policy xxx (xxxx) xxx 3.2 Method and analysis To examine the hypothesis, we follow DeFond and Zhang’s (2014) suggestion to examine multiple proxies for audit quality They encourage the examination of measures on the opposite end of the ‘‘egregiousness” spectrum to better ascertain their impact on audit quality and suggest there is a gradient of causality to these proxies for audit quality Therefore, we examine three measures of audit quality substantiated in prior literature: 1) discretionary accruals, 2) going concern issuance for distressed companies, and 3) the receipt of an AAER Examining abnormal or discretionary accruals provides insights into management’s discretion in the application of GAAP to their reported financial statements Lawrence, Minutti-Meza, and Zhang (2011) suggest this measure can reveal auditors influence on these decisions Discretionary accruals are powerful tools to alter reported earnings as they can be modified after year-end and right up to the earnings announcement date (Bratten et al., 2014) They not require a change in business operations or strategy; they are simply changes to the financial statement presentation of those operations We also examine the overall likelihood of issuing a going concern opinion as a measure of quality and independence Prior research of both auditor independence and audit quality utilize the likelihood of issuing a going concern opinion as an operational measure (Carson et al 2013) Specifically, the willingness to issue a going concern opinion is considered a significant measure of auditor independence (Chen et al., 2013), and a measure of audit quality (DeFond and Zhang 2014) Auditors risk reputational damage and litigation costs when failing to issue a going concern, and therefore, audit firms will resist management’s desire to avoid the going concern statement and report in a more conservative fashion (DeFond and Francis, 2005) We model the overall likelihood of issuing a going concern opinion to investigate the association between mutual auditor CFO tenure on audit quality and independence Additionally, this study employs AAERs that provide a potentially more relevant and direct measure of audit quality by measuring actual outcomes of the audit process (DeFond and Zhang 2014; DeFond and Francis 2005) AAERs report civil litigation and administrative proceedings by the SEC’s and represent severe violations of Generally Accepted Accounting Principles (Lennox and Pittman 2010) 3.3 Discretionary accruals For our first measure of audit quality we use discretionary accruals These represent abnormal accruals and could indicate attempts by management to alter reported financial statement balances The sample for this analysis starts with all observations available in non-financial service industries for the years 1994–2015 from Compustat (175,227) 12We next collect CFO data from Execucomp and Audit Analytics Since CFO’s are not always tracked on Execucomp (Brochet et al., 2011), we select unique additional observations provided in the Audit Analytics D&O changes database Joining this data set with our initial sample eliminates 95,495 observations After eliminating observations without sufficient data to calculate discretionary accruals (42,600) final sample contains 37,132 observations (see Table 1, Panel B) Following Dechow et al (1995), and Kothari et al (2005), the estimates of k1 ; k2 and k3 are those obtained from the original Jones model where total accruals are earnings before extraordinary items and discontinued operations minus the operating cash flows (IB-OANCF) DSALEt is the change of total revenue from t À to t year, DREC t is the change of net receivables from t À to t year, and PPE is the property, plant and equipment ROA is the net income (NI) divided by total assets (AT) Total Accrualt ẳ k1 1=AT t1 ị ỵ k2 DSALEt DREC t ị ỵ k3 PPEt ịỵk4 ROAt ị ỵ et AT tÀ1 Consistent with prior studies, we, winsorize all variables at the one percent tails before estimating equation (1) within years and 2-digit SIC codes (excluding industries with less than six members) Discretionary accruals, DA is equal to the residual values from estimating equation (1) Absolute discretionary accruals, ABSDA, is equal to the absolute value of DA Consistent with prior studies, we eliminate observations with ABSDA greater than one We estimate equation (2) to test for a relationship between audit quality and audit firm tenure (AUDTEN), CFO tenure (CFOTEN), and mutual tenure (MUTUAL) to capture the time period the CFO and audit firm worked together ABSDAt ẳ u0 ỵ u1 AUDTEN t ỵ u2 CFOTENt ỵ u3 MUTUALt ỵ u4 CASHFLOW t ỵ u5 LEV t ỵ u6 LITIGt þ u7 MBt þ u8 MV t þ u9 LOSSt þ u10 FIN t þ u11 LCAtÀ1 þ u12 BIGNt þ u13 SOX t þ u14 YearFEt þ u15 IndustryFEt þ e ð2Þ ABSDA as defined earlier, is the proxy for audit quality AUDTEN captures the number of years the auditor has been retained by the client beginning in 1980 CFOTEN captures the number of years a CFO worked with a company MUTUAL is the variable of interest and measures the mutual effect of audit firm tenure and CFO tenure on audit quality If mutual audit firm-CFO tenure leads to reduced audit quality, then the coefficient on MUTUAL will be positive We also include controls firm operating cashflow, leverage, and negative earnings to control for firm financial performance (CASHFLOW, LEV, LOSS), we include an indicator for firms in high litigation risk industries (LITIG) and a the log transformed market value of the firm (MV) to control for firm complexity and inherent risk Further, we include both the market-to-book value of the firm (MB) to control for firm growth and its effect on accruals and (FIN) to control for mergers or new financing In addition to cash 12 The sample period in 1994 as this is the first year that 100 or more observations with available CFO data is available Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J Account Public Policy xxx (xxxx) xxx J.L Payne and R Williamson flows, we also control for the prior year’s absolute value of current accruals (LCA) both of which directly affect the cashflowaccrual relationship We include controls for characteristics of the audit environment, specifically if the firm is a Big N auditor (BIGN) and if the firm year observation falls after the implementation of Sarbanes-Oxley (SOX) Finally, this model includes both industry fixed effects at the two-digit SIC code level and year fixed effects as well as firm clustered standard errors to control for firm, industry, and time specific variations in accruals Results 4.1 Discretionary accruals We present the descriptive statistics of the discretionary accruals sample in Table 1, Panel C The mean (median) value of ABSDA is 0.10 (0.06) and is consistent with levels reported in prior research The mean (median) values of AUDTEN and CFOTEN are 10.58 (9.00) and 3.80 (3.0) years, respectively Panel C provides a correlation matrix that indicates auditor tenure and CFO tenure are negatively associated with the absolute value of discretionary accruals.13 Table 2, Panel A presents the regression results of the discretionary accruals model (equation 2) using the absolute value of total accruals (ABSDA) The OLS results for our investigation of discretionary accruals, presented with our mutual tenure term of interest in Column B, and without in column A have adjusted R-square of 0.1966 and 0.1967 respectively These values suggest a reasonably good fit and are comparable to levels reported in prior research Panel A Column A reports the results of our discretionary accruals model without the term employed to capture the effect of mutual auditor/CFO tenure This model reports that both auditor tenure and CFO tenure are significantly negatively associated with discretionary accrual levels (AUDTEN, À0.0003, p < 0.01; CFOTEN, À0.001, p < 0.01) The coefficient on AUDTEN is negative and significant, indicating higher audit quality with longer audit firm tenure consistent some prior research (e.g., Myers et al 2003) The negative and significant coefficient on CFOTEN suggests that the CFOs’ increased tenure is associated with lower levels of accruals-based earnings management Panel A Column B reports the results of our model including the MUTUAL capture the effect of mutual auditor/CFO tenure associated with levels of discretionary accruals We find that, holding the levels of CFO and auditor tenure constant, the effect of another year of mutual auditor/CFO tenure is positive and significant (MUTUAL, 0.001, p < 0.05), suggesting that increasing mutual tenure between the auditor and CFO reduces audit quality as measured by increased levels of discretionary accruals 4.2 Discretionary accruals, mutual tenure, and corporate governance To explore our research question regarding corporate governance, we reexamine our mutual tenure and discretionary accrual model using cross sectional variation in our sample related to the quality of the firm’s corporate governance to identify high quality and low quality governance firms We then investigate if mutual tenure affects our measures of audit quality differently depending on the quality of the firm’s corporate governance To measure corporate governance we utilize the MSCI corporate governance index; MSCI generates a variety of responsibility metrics for publicly traded firms in order to build their socially responsible investment portfolios This database has been used extensively to examine corporate environmental and social concerns (Asante-Appiah, 2020; Ballou et al., 2018, Hummel and Schlick, 2016) and corporate governance issues (Kim et al., 2012; Cho et al., 2013) The MSCI Corporate Governance index includes measures of both governance strengths and concerns including audit committee independence, board of directors’ attendance, presence of poison pill provisions, etc.14 Using the MSCI corporate governance index we split our sample into ‘concern’ and ‘non-concern’ firms where concern firms are any firm where the MCSI reports a greater number of weaknesses than strengths.15 In Table Column C and D we report the results of our corporate governance (CG) tests within our CG concern and CG non-concern subsamples, respectively We find in column C that the association between discretionary accruals and mutual auditor/CFO tenure is positive and significant (Col C, MUTUAL, 0.002, p < 0.05) within our subsample of ‘concern’ firms and we not find a significant association reported in column D within our ‘non-concern’ sample This association suggests that within firms having higher quality corporate governance, mutual tenure does not contribute to an increase in absolute discretionary accruals while lower quality corporate governance is associated with increasing discretionary accruals In addition to our corporate governance sub-sample tests, we also split our sample between signed positive and negative discretionary accruals This investigation, reported in Table Panel B columns titled POSDA and NEGDA, finds that for income-increasing accruals (POSDA) the coefficient on MUTUAL is positive and significant (0.001, p < 0.10), however, for income-decreasing accruals, the coefficient is not significant (0.001, p > 0.10) To the extent that income increasing discre13 The remaining control variables have values consistent with prior research and the correlations between the remaining independent variables are well within acceptable levels and not indicate the presence of multicollinearity 14 The methodology to generate the MSCI Corporate Governance Index may be found here: https://www.msci.com/eqb/methodology/methdocs/MSCI_ Governance-Quality_Jun15.pdf 15 The ‘non-concern’ firms in this sample include ‘balanced’ firms where net strengths-weaknesses = 0; we find consistent results if we choose to include ‘balanced firms’ with concern firms or omit them from the model Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J.L Payne and R Williamson J Account Public Policy xxx (xxxx) xxx Table Audit Firm Tenure, CFO Tenure and Discretionary Accruals (ABSDA) Panel A.We estimate equation (2) to test for a relationship between audit quality and audit firm tenure (AUDTEN), CFO tenure (CFOTEN), and mutual tenure (MUTUAL) to capture the time period the CFO and audit firm worked together.ABSDAt =t u0 + u1AUDTEN + u2CFOTEN + u3MUTUAL + u4CASHFLOW + u5LEV + u6LITIG + u7MB + u8MV + u9LOSS + u10FIN + u11 LCA + u12 BIGN + u13SOX + u 14ear FE + u15Industr FE + e (2) (A) Simple Variables MUTUAL AUDTEN CFOTEN CASHFLOW LEV LITIG MB MV LOSS FIN LCA BIGN SOX Intercept Coef À0.0003 À0.001 À0.100 0.012 0.012 0.001 À0.006 0.021 0.010 0.021 À0.026 0.024 0.128 (B) Mutual (C) CG Concern t-stat Coef t-stat À2.62 À4.11 À12.62 5.14 6.29 7.49 À10.89 9.59 6.00 5.86 À9.05 16.70 31.19 0.001 À0.0004 À0.002 À0.100 0.012 0.012 0.001 À0.006 0.021 0.010 0.021 À0.026 0.024 0.128 1.87 À3.03 À3.94 À12.62 5.16 6.26 7.48 À10.85 9.60 5.99 5.88 À9.08 16.64 31.34 Firm Clustered SE Industry FE Year FE N R-square *** *** *** *** *** *** *** *** *** *** *** *** *** ** *** *** *** *** *** *** *** *** *** *** *** *** *** Yes Yes Yes 37,132 0.1966 Coef t-stat 0.002 À0.0003 À0.002 0.043 À0.012 À0.002 0.001 À0.003 0.037 0.011 0.189 À0.022 0.014 0.093 2.14 À1.72 À2.66 1.51 À1.81 À0.49 2.54 À2.78 7.42 3.41 5.27 À2.53 4.94 8.04 Yes Yes Yes 37,132 0.1967 (D) CG Non-Concern ** * *** *** ** *** *** *** *** ** *** *** Coef t-stat 0.001 À0.0004 À0.002 À0.104 0.013 0.013 0.001 À0.007 0.019 0.010 0.019 À0.024 0.026 0.129 1.52 À2.74 À3.69 À12.76 5.23 6.17 6.88 À10.69 8.18 5.32 5.35 À8.10 16.40 29.91 Yes Yes Yes 5429 0.0860 *** *** *** *** *** *** *** *** *** *** *** *** *** Yes Yes Yes 31,644 0.2032 ***, ** and * denote statistical significance at the 1, and 10 percent levels, respectively, using two-tailed tests The t-statistics reported in parentheses are based on standard errors that are heteroskedasticity robust and clustered at the firm level Regressions include year and industry fixed effects Column A reports the results of our model without our variable of interest, MUTUAL, which is included in our model reported in column B Columns C and D report regression results when the MCSI governance score is negative (Col C) or non-negative (Col D) respectively Panel B: Audit Firm Tenure, CFO Tenure and Discretionary Accruals (POSDA and NEGDA) POSDA NEGDA Variables Coef t-stat MUTUAL AUDTEN CFOTEN CASHFLOW LEV LITIG MB MV LOSS FIN LCA BIGN SOX Intercept Firm Clustered SE Industry FE Year FE N R-square 0.001 À0.001 À0.002 0.007 0.022 0.011 0.001 À0.005 0.048 0.007 0.026 À0.025 0.016 0.090 Yes Yes Yes 21,934 0.1673 1.77 À1.34 À3.08 0.63 7.47 5.87 5.11 À7.96 19.42 3.82 6.22 À7.80 10.70 18.45 * *** * *** *** *** *** *** *** *** *** *** *** Coef t-stat 0.001 À0.0001 À0.002 À0.180 0.005 0.008 0.001 À0.009 À0.018 0.011 0.017 À0.025 0.034 À0.000 Yes Yes Yes 15,198 0.2493 1.14 À2.99 À2.42 À17.35 1.34 3.04 5.47 À9.19 À5.1 4.36 3.17 À6.1 14.71 24.95 *** ** *** *** *** *** *** *** *** *** *** *** ***, ** and * denote statistical significance at the 1, and 10 percent levels, respectively, using two-tailed tests The t-statistics reported in parentheses are based on standard errors that are heteroskedasticity robust and clustered at the firm level Regressions include year and industry firm fixed effects This table uses the ABSDA sample with 37,132 observations, to examine how audit firm tenure (AUDTEN), CFO tenure (CFOTEN) and the period of mutual tenure (MUTUAL) influence reported accrual balances ABSDA is calculated following Dechow, Sloan, and Sweeney (1995), and Kothari, Leone, and Wasley (2005) Variable definitions are in Table 1, Panel A tionary accruals represent opportunistic reporting, our results provide some evidence that mutual tenure is associated with this behavior The results from these analyses indicate that as the mutual tenure of the CFO and audit firm increases, audit quality is reduced as more discretionary accruals are used by management in their reported financial statements In other words, financial statement quality, as measured by management’s use of discretionary accruals, is lessened as mutual tenure increases Further, our subsample investigation suggests that corporate governance has an important and significant role to play in determining how mutual tenure affects audit quality 10 Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J Account Public Policy xxx (xxxx) xxx J.L Payne and R Williamson 4.3 Going concern opinion issuance The sample for this analysis includes all observations available from our analysis of Model (37,132) Joining this sample with going concern data from Audit Analytics and capturing both daily and monthly return data from CRSP reduces the sample by 9464 observations To limit our analysis to distress firms we only retain firms with either negative cash flows or negative earnings (Bruynseels and Cardinaels 2013) (21,165), leaving a final sample of 6503 for our analyses We specify and estimate equation (3) to test for a relationship between going concern issuance, audit firm tenure (AUDTEN), CFO tenure (CFOTEN), and the period of mutual tenure (MUTUAL) Control variables are motivated by DeFond et al (2002), and Bruynseels and Cardinaels (2013) The coefficients are estimated in the following logistic regression including controls for firm, industry, and year fixed effects: GC t ẳ u0 ỵ u1 AUDTEN t ỵ u2 CFOTENt ỵ u3 MUTUALt ỵ u4 D2Dt ỵ u5 AGEt ỵ u6 LEV t ỵ u7 FIN ỵ u8 BIGNt ỵ u9 CASHFLOW ỵ u10 SOXỵu11 FirmFE ỵ u12 YearFE ỵ u13 IndustryFE ỵ e 3ị 4.4 Results We present the descriptive statistics of the going concern sample in Table 1, Panel C On average, about 8.0% of the observations experience going concern (GC) report The mean values of AUDTEN and CFOTEN are 10.58 and 3.80 years, respectively The correlation matrix shown in Table 1, Panel D provides initial evidence that audit firm tenure and CFO tenure are associated with going concern issuance The correlations between the remaining independent variables are below levels that would indicate multicollinearity problems Table presents the logit regression results of the going concern model In Column A, for the model of only the main effects of auditor tenure and CFO tenure the coefficient on audit tenure is nonsignificant (AUDTEN, À0.015, p > 0.10) The coefficient on CFO tenure is negative and significant (CFOTEN, À0.105, p < 0.01), implying the likelihood of a going concern is significantly lower as the CFO tenure increases In Column we introduce the count variable of mutual tenure between auditor tenure and CFO tenure (MUTUAL) into the model to investigate the effect of mutual auditor and CFO tenure When controlling for the effect of mutual auditor/CFO tenure we find the main effects of auditor tenure and CFO tenure are nonsignificant We see that an increase in mutual auditor/CFO tenure is associated with a decreased likelihood of going concern issuance (MUTUAL À0.117, p < 0.05) This implies that when controlling for the main effects of auditor and CFO tenure, the number of years the CFO and auditor work together have a negative effect on the likelihood of issuing a going concern opinion and support our hypothesis that increasing mutual tenure between the auditor and the CFO reduces audit quality 4.5 Going concern, mutual tenure, and corporate governance Again, we examine the impact of mutual tenure within subsamples based on the quality of the firm’s corporate governance where concern firms are all firms where the count of corporate governance concerns is higher than the count of corporate governance strengths within the MCSI corporate governance index In Column C and D, we report the results of our corporate governance subsample tests We find that the association between going concern issuance and mutual auditor/CFO tenure is negative and significant (Col C, MUTUAL, À0.585, p < 0.05) within our subsample of ‘concern’ firms and we not find a significant association within our ‘non-concern’ sample This association suggests that within firms having higher quality corporate governance, mutual tenure not contribute to a decrease in the likelihood of going concern issuance 4.6 AAERs Accounting and Auditing Enforcement Releases (AAERs) have been issued by the SEC since 1982 and report the outcomes SEC investigations in which companies and/or auditors accept fines or other administrative action but not formally plead guilty In addition to examining discretionary accruals, we follow the suggestions of DeFond and Francis (2005) and DeFond and Zhang (2014) encouraging the examination of fraudulent activity using AAERs as an additional relevant and direct measure of quality Adapting the model developed in Lennox and Pittman (2010), we investigate if audit firm and CFO tenure is associated with the likelihood of the audit client receiving an AAER from the SEC The resulting model, including firm, industry, and year fixed effects, is specified as: AAER ẳ u0 ỵ u1 AUDTEN t ỵ u2 CFOTENt ỵ u3 MUTUALt ỵ u4 ASSETSt ỵ u5 ROAt þ u6 BIGnt þ u7 AGE þ u8 FINt þ u9 NEG EQUITY ỵ u10 CASHFLOW ỵ u11 SOX ỵ u12 FirmFE ỵ u13 YearFE ỵ u14 IndustryFE ỵ e ð3Þ Where AAER Fraud is an indicator variable equal to one if the audit client is subject to an AAER and zero otherwise16 16 We obtained the AAER data from the Center for Financial Reporting & Management at the University of California, Berkeley, Haas School of Business A detailed description of the data collection is available in Dechow et al (2011) Note that there is a significant time lag between the release of the AAER and the financial statement reporting date, which restricts our sample period Our data ends with AAER 3706 issued September 28, 2015 11 Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J.L Payne and R Williamson J Account Public Policy xxx (xxxx) xxx Table Audit Firm Tenure, CFO Tenure and Going Concern Issuance (GC).GCt = u + u1AUDTENt + u2CFOTENt + u3MUTUAL t + u4D2D FE + u13Industry FE + e (3) (A) Simple t + u5AGE t + u6LEV + u7FINt + u 8BIGN (B) Mutual Variables Coef ChiSqr MUTUAL AUDTEN CFOTEN D2D AGE LEV FIN BIGN CASHFLOW SOX Intercept Firm FE Industry FE Year FE N Likelihood Ratio À0.015 À0.105 1.160 À0.013 1.063 À0.031 À1.028 À2.299 0.327 À2.955 Yes Yes Yes 6503 716.10 2.33 18.17 94.84 7.60 76.60 0.08 81.85 153.69 2.50 131.03 *** *** *** *** *** *** *** *** t + u9CASHFLOW + u10SOX (C) CG Concern Coef ChiSqr À0.117 À0.006 À0.028 1.160 À0.014 1.058 À0.038 À1.029 À2.310 0.334 À2.933 Yes Yes Yes 6503 721.09 5.25 0.34 0.50 94.81 9.16 75.92 0.12 81.87 154.11 2.62 129.02 ** *** *** *** *** *** *** *** t + u11Firm FE + u12Year (D) CG Non-Concern Coef ChiSqr À0.585 0.105 0.395 1.275 À0.021 2.133 À0.224 À1.931 À2.662 À0.130 À5.224 Yes Yes Yes 820 50.06 5.77 4.66 6.25 3.40 0.70 14.99 0.06 5.55 4.71 0.01 11.06 ** ** ** * *** ** ** *** *** Coef ChiSqr À0.095 À0.010 À0.047 1.172 À0.013 1.002 À0.065 À0.912 À2.287 0.396 À2.923 Yes Yes Yes 5683 647.70 2.67 0.90 1.28 92.12 6.70 63.47 0.36 62.62 147.68 3.53 123.26 *** *** *** *** *** * *** *** This table presents the regression results of the GC model regression Regressions include year, industry, and firm fixed effects The v -statistics reported in parentheses are based on standard errors ** and *** indicate statistical significance at the 5%, and 1% levels (two-tailed), respectively We specify and estimate equation (3) to test for a relationship between going concern issuance, audit firm tenure (AUDTEN), CFO tenure (CFOTEN), and the period of mutual tenure (MUTUAL) Control variables are motivated by DeFond et al (2002), and Bruynseels and Cardinaels (2013) This table uses the GC sample with 6503 observations GC is set equal to one if the firm received a going concern opinion in the current year, otherwise (Audit Analytics) Variable definitions are in Table 1, Panel A Column A reports the results of our model without our variable of interest, MUTUAL, which is included in our model reported in column B Columns C and D report regression results when the MCSI governance score is negative (Col C) or non-negative (Col D) respectively Table Audit Firm Tenure, CFO Tenure and AAERs AAER = u0 + u1AUDTENt + u2CFOTENt + u3MUTUAL t + u4 ASSETS t + u5ROAt + u6BIGnt + u7AGE + u8FIN t + u9 NEG_EQUITY + u10 CASHFLOW + u11SOX + u12Firm FE + u13Year FE + u14Industry FE + e (4) AAER (A) Simple (B) Mutual Variables Coef ChiSqr MUTUAL AUDTEN CFOTEN ASSETS ROA BIGN FIN NEG_EQUITY CASHFLOW SOX Intercept Firm FE Industry FE Year FE N Likelihood Ratio À0.028 À0.091 0.187 0.188 0.006 0.251 À2.392 À0.759 À1.320 À4.755 Yes Yes Yes 31,576 222.23 8.76 10.49 25.25 1.40 0.00 3.89 5.53 4.07 93.87 253.91 *** *** *** *** ** ** ** *** *** (C) CG Concern Coef ChiSqr 0.134 À0.036 À0.193 0.190 0.186 À0.007 0.248 À2.400 À0.764 À1.334 À4.742 Yes Yes Yes 31,576 218.41 3.68 11.75 9.38 26.08 1.36 0.00 3.81 5.57 4.11 95.46 252.98 ** *** *** *** ** ** ** *** *** *** (D) CG Non-Concern Coef ChiSqr Coef Chi-Sqr 0.301 À0.037 À0.305 0.074 0.100 0.217 0.253 À0.696 À2.227 À1.906 À3.210 Yes Yes Yes 5429 71.21 4.06 3.67 4.65 0.66 0.01 0.08 0.82 0.43 3.69 49.27 10.71 ** * ** 0.086 À0.038 À0.173 0.155 0.342 À0.025 0.300 À15.747 À0.683 À1.318 À4.540 Yes Yes Yes 27,071 173.27 *** ** *** *** 1.09 9.23 5.64 12.44 1.36 0.01 4.33 0.00 2.45 64.34 185.84 *** ** *** ** *** *** *** This table presents the regression results of AAER fraud model regression Regressions include year, industry, and firm fixed effects The v2-statistics reported in parentheses are based on standard errors ** and *** indicate statistical significance at the 5%, and 1% levels (two-tailed), respectively We adapt the model developed in Lennox and Pittman (2010) and investigate if variation in mutual auditor/CFO tenure is associated with the likelihood of the audit client receiving an AAER from the SEC AAER is set equal to one if the firm was included in an Accounting and Auditing Enforcement Release (AAER) from the US Securities and Exchange Commission (SEC) that was classified as fraud Column A reports the results of our model without our variable of interest, MUTUAL, which is included in our model reported in column B Columns C and D report regression results when the MCSI governance score is negative (Col C) or non-negative (Col D) respectively 12 Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J Account Public Policy xxx (xxxx) xxx J.L Payne and R Williamson 4.7 Results To investigate the association between mutual auditor/CFO tenure and AAERs, we start with our sample from Model with 37,132 observations We then reduce the sample by 5556 missing observations for control variables leaving a final sample of 31,576 We specify a logit model where AAER Fraud equals one for AAER clients and zero otherwise Table 1, Panel C provides the descriptive statistics for the variables used in our analyses The variables have values consistent with prior research The receipt of an AAER is very rare, around 1% of our population Table presents the results of the logistic regression Column A reports the result of our AAER model without our variable of interest to capture the main effects of auditor and CFO tenure We find that auditor tenure and CFO tenure are both significantly negative (AUDTEN, À0.028, p < 0.01; CFOTEN, À0.091, p < 0.01) In our full model, reported in Column B, including the term to capture the effect of mutual auditor/CFO tenure (MUTUAL), the coefficient of AUDTEN is negatively associated (À0.036, p < 0.01) with the likelihood of a client receiving an AAER Likewise, CFOTEN is negatively associated with the receipt of an AAER (À0.193, p < 0.01) Extended periods of mutual tenure between the firm and a CFO leads to lower audit quality as evidenced by increased receipt of an AAER (MUTUAL, 0.134, p < 0.05) This suggests that stability within the audit engagement and the CFO position separately reduces the likelihood of an AAER, when controlling for mutual auditor/CFO tenure, but that when holding those values constant, an increase in mutual auditor/CFO tenure significantly reduces audit quality and increases the likelihood of receiving an AAER Control variables are generally consistent with expectations 4.8 AAERs, mutual tenure, and corporate governance To examine the way corporate governance may change how mutual tenure is associated with the likelihood of receiving an AAER we examine our regression models within corporate governance concern and non-concern subsamples and report the results of these tests in column C, concern firms, and column D, non-concern firms We find that the association between mutual tenure and AAER is insignificant within our ‘non-concern’ firm sample, but positive and significant in our ‘concern’ firm sample (Col C, MUTUAL, 0.301, p < 0.05) This association suggests that within firms lower higher quality corporate governance, mutual tenure contributes to an increased likelihood of AAER issuance and this association is not apparent within our sample of non-concern firms When considered in context with our other audit quality results, this suggests that corporate governance plays a pivotal role in the potentially negative effects of mutual tenure between the auditor and client management in charge of financial reporting Additional procedures 5.1 Internal control over financial reporting (ICFR) In addition to the procedures described above we also performed additional investigations of the relationship between mutual tenure and audit quality First, we examined the relationship between mutual tenure and identified deficiencies within internal control over financial reporting We collect material weakness information from the Audit Analytics database and set an indicator variable equal to one if the firm reports at least one material weakness in year t (ICFR) We then regress this variable on our measures of Auditor, CFO, and mutual tenure (AUDTEN, CFOTEN, MUTUAL) as well as control variables for auditor effort, independence, and size (AF, NAF, BIGN), firm size and complexity (MV), growth (MB), and financial risk and performance (LEV, LOSS) Further, we include firm, industry, and year fixed effects and report the results of this test in Table We find that mutual tenure is significantly and negatively associated with the likelihood of reporting a material weakness in internal control (Col B, MUTUAL, À0.120, p < 0.01) Further, when we examine this association split between firms with lower quality and higher quality corporate governance scores we find that the association between mutual tenure and reporting ICFR material weakness is insignificant within our ‘concern’ firm sample, but negative and significant in our ‘non-concern’ firm sample (Col D, MUTUAL, À0.123, p < 0.01) This association suggests that within firms having higher quality corporate governance, mutual tenure contributes to the quality of the accounting information system and financial statement audits and decreases the likelihood of reporting a material weakness in ICFR Considered in context, this result suggests that positive benefits to mutual tenure that can accrue in the presence of higher quality corporate governance in some settings confirming DeFond and Zhang’s (2014) suggestion to use multiple measures when investigating audit quality 5.2 Short mutual tenure We also consider the CAQ’s suggestion that naturally occurring labor market turnover between the CFO and audit firm might mitigate auditor skepticism concerns We examine if identified associations between mutual tenure and audit quality persist within a ‘short’ tenure sample Prior literature utilizes as a three-year cutoff to examine the time period after an auditor change to investigate differential quality from short audit firm tenure (Johnson et al 2002, Carcello and Nagy 2004, Read and Yezegel 2016) We acknowledge that the use of this cut-off to analyze short audit firm tenure might not extend to peri13 Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J.L Payne and R Williamson J Account Public Policy xxx (xxxx) xxx Table Audit Firm Tenure, CFO Tenure and ICFR weakness.ICFR = u0 + u1AUDTENt + u2CFOTENt + u3MUTUAL t + u4 AF t + u5NAFt + u6LEVt + u7MB + u8MV t + u9 BIGn + u10 LOSS + u11Firm FE + u12Year FE + u13Industry FE + e (5) AAER (A) Simple (B) Mutual Variables Coef ChiSqr MUTUAL AUDTEN CFOTEN AF NAF LEV MB MV BIGN LOSS Intercept Firm FE Industry FE Year FE N Likelihood Ratio À0.035 À0.098 0.066 À0.011 0.205 À0.001 À0.249 À0.409 0.435 À1.089 Yes Yes Yes 24,870 2272.82 78.56 94.28 10.75 4.36 107.96 0.06 219.49 42.44 65.58 21.32 *** *** *** *** ** *** *** *** *** *** (C) CG Concern Coef ChiSqr À0.120 À0.027 À0.019 0.068 À0.011 0.200 À0.001 À0.253 À0.405 0.429 À1.087 Yes Yes Yes 24,870 2305.38 34.01 42.69 1.49 11.41 3.99 102.24 0.06 224.92 41.56 63.66 21.45 *** *** *** ** *** *** *** *** *** *** (D) CG Non-Concern Coef ChiSqr À0.013 À0.061 À0.108 1.259 À0.031 À0.197 0.038 À0.729 0.056 0.217 À14.816 Yes Yes Yes 4377 229.44 0.02 22.46 2.65 102.40 1.77 0.47 7.27 82.66 0.03 1.41 113.64 *** *** *** *** *** *** Coef ChiSqr À0.123 À0.025 À0.013 0.032 À0.011 0.191 À0.002 À0.235 À0.403 0.422 À0.699 Yes Yes Yes 20,493 2021.48 33.21 32.24 0.66 2.83 4.40 92.91 0.55 183.23 38.29 55.80 9.56 *** *** * ** *** *** *** *** *** *** This table presents the regression results of ICFR Weakness model regression Regressions include year, industry, and firm fixed effects The v2-statistics reported in parentheses are based on standard errors ** and *** indicate statistical significance at the 5%, and 1% levels (two-tailed), respectively We utilize the Audit Analytics database to identify firms with at least one reported weakness in internal control over financial reporting (ICFR = 1) We include log transformed audit fees (AF) to control for auditor effort, log transformed non-audit service fees (NAF) to control for auditor independence, and we control for auditor size with an indicator variable for major public audit firms (BIGN) We control firm size and complexity by including our measure of market value (MV) and control for firm risk through the inclusion of the market-to-book ratio (MB), firm leverage (LEV), and an indicator if the firm reports a loss (LOSS) Columns C and D report regression results when the MCSI governance score is negative (Col C) or non-negative (Col D) respectively ods of short mutual tenure, but given that this period reasonably conforms to the mean value of our mutual tenure measure of 3.34 years, we use it to investigate the potential affects of short mutual tenure In untabulated results, we find that there is no significant association between mutual tenure and the level of discretionary accruals (MUTUAL, À0.001p > 0.10), the likelihood of AAER issuance (MUTUAL, 0.130, p > 0.10), and the likelihood of reporting a material ICFR weakness (MUTUAL, 0.034, p > 0.10) within a sample limited restricted to three years of mutual tenure These insignificant associations with the first three years of mutual tenure provide some support for the CAQ’s conjecture that naturally occurring labor market turnover for the CFO and audit firm might mitigate audit quality concerns related to auditor tenure.17 5.3 Financial restatements and fraud We also examine the likelihood of financial restatements as an additional relevant measure of audit quality by measuring the direct outcomes of the audit process (DeFond and Zhang 2014, DeFond and Francis 2005) Christensen et al (2016) suggest restatements provide a readily available signal of low audit quality and prior research suggests that higher audit quality is associated with a reduced incidence of earnings restatements (Knechel et al., 2012) We collect restatement data from Audit Analytics and code an indicator variable equal to for financial statement years that are later adversely restated due to fraud We regress this indicator variable on our variable of interest, MUTUAL, as well as our controls for auditor and CFO tenure (AUDTEN, CFOTEN), controls for the quality of the financial reporting system and for auditor size (ICFR, BIGN), controls for firm size and complexity (MV), growth (MB), and financial risk and performance (LEV, LOSS) In an untabulated analysis, we find that mutual tenure between the CFO and the audit firm is positively and significantly associated with the likelihood of the firm issuing a subsequent earnings restatement from an incidence of fraudulent financial reporting (MUTUAL, 0.2188, p < 0.05) 5.4 Litigation risk To examine the potential role of litigation risk we re-examine our main tests within subsamples of high-risk industry firms and other industry firms We include observations where the company-year is in a high litigation industry, defined 17 In alternative model specifications we utilize a continuous interaction term between auditor tenure and CFO tenure and identify a strong and consistent non-linear relationship between mutual tenure in the long tenure group and no relationship withing the short tenure window However, this non-linear relationship is difficult to interpret and prone to over identification of small effects For this reason we exclude this specification from our main report 14 Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J Account Public Policy xxx (xxxx) xxx J.L Payne and R Williamson as SIC codes: 2833–2836, 3570–3577, 3600–3674, 522–5961, 7370–7474 in our high litigation risk subsample In untabulated analyses, we find a negative association between mutual tenure and the likelihood of receiving a going concern opinion (MUTUAL, À0.002p < 0.05) within the low-litigation risk subsample Our going concern tests suggest that mutual tenure does not reduce the auditors’ likelihood of issuing a going concern for high litigation risk firms This a result is consistent with Kaplan and Williams’ (2013) findings that audit firms issue going concerns opinions in response to increased litigation risk We find no discernable difference between our litigation risk subsamples for our tests of discretionary accruals, AAER likelihood or ICRF weakness Limitations As with prior studies on the determinants of audit quality, there are several potential disadvantages to the measures used to assess audit quality Schelleman and Knechel (2010) question the appropriateness of discretionary accruals as they are likely closely monitored by auditors Discretionary accruals also likely contain measurement error (DeFond and Zhang 2014) Another limitation is that the absence of a going concern opinion or AAER cannot be interpreted as high audit quality as less egregious within-GAAP earnings management might have occurred Another drawback of AAERs and going concern opinions is that they are relatively rare events, especially AAERs An additional concern is that material misstatements allowed by low-quality audits may simply go undetected by ex-post reviews by the SEC, investors, management, and auditors We attempt to control for these limitations by examining three separate proxies for audit quality that represent distinct levels of reporting error We also perform (non-tabulated) tests to assess if endogeneity is apparent in our analysis We utilize a simultaneous equations model to examine all models jointly with an auditor change model and not find a significant association between dependent variables (Rho > 0.10) We recognize that this lack of significant association in both a Heckman approach and a simultaneous equations approach does not rule out endogeneity, but simply fails to find it We accept this limitation; and because of potential endogeneity problems, an alternative interpretation of these findings is that lower financial reporting quality leads to shorter CFO and auditor tenure (DeFond and Zhang 2014; Lennox et al 2014) Another limitation is the lack of actual audit partner data to determine the audit partner/CFO relation in many studies Litt et al (2014) generate a proxy statistic for audit partner rotation Assuming audit partners remain on engagement for the entire five-year rotation period, they simulate audit partner change for the time period under SOX This measure likewise introduces measurement error, as the actual audit partners are not known Another limitation to this method is that less than three percent of Gipper et al.’s (2018) PCAOB data on audit partner tenure derived from auditor changes Because of limited data, research on audit partner rotation is limited to a few studies mostly from international settings where audit partner information is available.18 These studies not provide consistent evidence that audit partner tenure provides additional information over audit firm tenure (Chi et al 2009; Chen et al 2008; Moore et al 2006; Fitzgerald et al 2012) and importantly, none of these studies consider the potential influence of the mutual tenure with the client’s CFO In a recent review of the audit partner rotation studies, Lennox and Wu (2018) note that U.S studies provide somewhat mixed evidence on the consequences of partner rotation Future research could use actual partner tenure, as the data becomes available, to examine its potential influence on the relationships found in this study and to contribute to the ongoing debate of the usefulness of mandatory audit partner rotation Conclusion This paper makes an important contribution to the literature By examining the relationships that develop between audit firms and their client’s CFOs, we contribute new insights to the debate on audit firm rotation In this paper, we examine the influence of the relationship between the audit firm and their client’s CFOs on audit quality Previous research that has extensively examined the effects of audit firm tenure on the quality of the audit provides inconsistent evidence We argue that investigating audit firm effects alone, without considering the underlying relationships that develop between a client and an audit firm, could be one reason for the inconsistent results In this paper, we attempt to identify one such important relationship, that between an audit firm and their client’s CFOs The results indicate that an increase in the audit firm’s tenure with their client’s CFO is associated with clients reporting more discretionary accruals, fewer going concern opinions, and that are more likely to receive an AAER These are all indicative of lower audit quality We also examine these effects in high quality and low quality corporate governance subsamples and find that negative effects from long mutual tenure are concentrated within the low quality corporate governance subsample indicating that auditor rotation may be more important for these firms Additional test investigating the relation between mutual tenure and material weaknesses reported in the ICFR, short periods of mutual tenure, financial restatements from fraud, and separately by litigation risk classification provides some additional evidence that increasing mutual tenure is detrimental to audit quality but also shows a nuanced trade-off between the positive and negative impacts of increasing mutual tenure This paper presents interesting new evidence on how relationships between audit firms and client CFOs can affect audit quality and should be useful to regulators as they consider policies on mandatory audit firm rotation The results suggest that 18 Taiwan, Australia, Belgium, and others require the lead audit partner to personally sign the audit opinion 15 Please cite this article as: J.L Payne and R Williamson, An examination of the influence of mutual CFO/audit firm tenure on audit quality, J Account Public Policy, https://doi.org/10.1016/j.jaccpubpol.2021.106825 J.L Payne and R Williamson J Account Public Policy xxx (xxxx) xxx the positive and negative effects of longer mutual tenure between the CFO and the audit firm is a complex question and one where a ‘one-size-fits-all’ strategy may be suboptimal This study suggests a more targeted approach to audit firm rotation by focusing on those companies with lower quality corporate governance and considering the individuals, not only the firms, involved Acknowledgement We appreciate the comments and suggestions from two anonymous reviewers, the editor (Divesh Sharma), and senior editor (Marco Trombetta) We acknowledge the financial support from the Von Allmen Research Support Endowment at the University of Kentucky, the financial support from the KPMG Professorship/Fellowship Endowment at the University of Kentucky, and the Institute for the Study of Free Enterprise at the University of Kentucky Comments received participants in workshops at the University of Kentucky and St John’s University are greatly appreciated References American Institute of Certified Public Accountants (AIPCA), 1978 The Commission on Auditors’ Responsibilities: Report, Conclusions, and Recommendations AICPA, New York, NY American Institute of Certified Public Accountants (AIPCA) SEC Practice Section, 1992 Statement of Position Regarding Mandatory Rotation of Audit Firms of Publicly Held Companies AICPA, New York, NY Antle, R., Nalebuff, B., 1991 Conservatism and auditor-client negotiations J Account Res 29, 31–54 Anton, G.J., Melancon, 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MUTUAL is the variable of interest and measures the mutual effect of audit firm tenure and CFO tenure on audit quality If mutual audit firm- CFO tenure leads to reduced audit quality, then the coefficient... extends the understanding of the influence of audit firm tenure on audit quality by identifying the influence of these relationships Specifically, we investigate audit quality measured as 1) the. .. that mutual tenure negatively influences audit quality and suggest that a significant portion of audit quality concerns arising from auditor tenure are a function of the mutual tenure between the