The impact Dodd Frank's Act on audit firm tenure

Abstract

This study examines the effect of Dodd Frank's Act of 2010 (Dodd's Act) on the duration of the auditor‐client relationship. One of the provisions of Dodd's Act was to permanently exempt nonaccelerated filers from mandatory internal control audits and to maintain the internal control requirement for accelerated filers. The results indicate that average audit firm tenure has increased significantly in the post‐Dodd period, and there is a post‐Dodd increase (decrease) in long and medium (short) tenure. Furthermore, the increase is more pronounced for nonaccelerated filers on average, and varies across big4 and non‐big4 auditors. The inferences are robust to the inclusion of various controls, and to the exclusion of the financial crisis period (2008–2010). Collectively, the findings suggest that Dodd's Act permanent exemption has resulted in lower margins for auditors, and thus motivated audit firms, particularly non‐big4 auditors, to extend their tenure with clients.