The Impact of Auditor Tenure on Initial Bond Ratings

The desirability of mandated auditor rotation represents an ongoing debate in the accounting profession. Proponents assert that audit quality (through auditor independence) is threatened by extended auditor-client relationships. Opponents assert that mandatory auditor rotation will actually decrease audit quality, primarily due to the time required for auditors to learn the nuances of a client's business processes. Our research contributes to this important debate by providing empirical evidence regarding the capital markets effects of audit tenure. Specifically, we examine newly issued bonds over the period 1990-2002 and find auditor tenure to be positively related to ratings received. This finding remains consistent across all sample issues regardless of investment grade, firm performance, or time period. We find no evidence that extended auditor-client relationships result in a decrease in the perceptions of audit quality.