Auditor Tenure and Misreporting: Evidence from a Dynamic Oligopoly Game.

This article develops and estimates an infinite-horizon dynamic oligopoly model of audit firm tenure, audit quality, and client misstatements, focusing on the effects of mandatory audit firm rotation policies. The model captures forward-looking behavior of both clients and audit firms, where longer auditor tenure reduces audit production costs, improves audit quality, lowers fees, and decreases misstatement rates, while mandatory rotation disrupts these benefits by forcing switches and shortening tenure. Counterfactual analyses for the U.S. setting show that mandatory rotation significantly reduces the Big Four audit firms' market share and increases misstatement rates due to diminished audit quality and higher switching costs borne by clients. The findings highlight trade-offs in regulatory oversight, suggesting that mandatory audit firm rotation may unintentionally impair financial reporting quality despite promoting auditor turnover.