<p>We provide a litigation-based model for the relationship between auditor tenure (the length of an auditor-firm engagement) and financial reporting quality (the unbiasedness of financial report). Featuring audit as estimation and issuance by an auditor on its client’s earnings, we show that the auditor’s minimization of expected litigation costs from potential audit errors creates a downward bias in its attested report of earnings. In addition, we show that the magnitude of such downward bias declines as the auditor accumulates experience with its client over time (tenure improves reporting quality). To distinguish this litigation-induced result from the independence-driven explanation that also claims higher earnings for longer auditor tenure, we further our analysis by offering an identification mechanism which unveils a new result that for firms with increased litigation risks, longer auditor tenure increases the downward biases (tenure impairs reporting quality). Such an inverse U-shaped relationship derived from our theoretical model may reconcile much of the mixed evidence in prior empirical studies.</p>