The study responds to the call for more academic research on the individuals that perform audits by examining a jurisdiction where audit partner identification is mandatory. Using the Taiwan market, the results show that engagement partner identification provides informational value to capital market participants. From a regulatory perspective, regulators believe that providing information that allows for investor evaluation of the audit partner’s past engagement performance is helpful for investment decision-making. This study provides support for the regulators’ views.
Aobdia, D., C. Lin, and R. Petacchi. 2015. Capital Market Consequences of Audit Partner Quality. The Accounting Review 90 (6): 2143–2176.
This study uses engagement-level audit partner data, to analyze whether audit quality is driven by client importance at the office- or partner-level. Overall, the results contribute to evidence showing that investor protection rules and laws at the country-level are associated with engagement-level audit quality. This indicates the importance of strong investor protection regulations. These results may be of interest to shareholders and securities market regulators, especially in developing economies, transitional economies, or economies where such regulations are weak. Additionally, these results may be of interests to auditors in countries with such economies. Finally, to the extent that audit firms serve clients with investors that receive varying levels of protection (i.e. public vs. private or a “well-known seasoned issuer”), these results may indicate opportunities for such firms to enhance audit requirements for certain non-public engagements.
The results of this study also suggest that audit accountability at the individual level makes auditors more sensitive to the costs of audit failure. This result may have implications for auditor accountability from a regulatory standpoint, as well as an audit firm policy standpoint.
Chen, S., S. Y. J. Sun, and D. Wu. 2010. Client Importance, Institutional Improvements, and Audit Quality in China: An Office and Individual Auditor Level Analysis. The Accounting Review 85 (1): 127-158.
Requiring engagement partners to sign their names to audit reports appears to result in increased audit quality, earnings informativeness, and audit fees, suggesting that the signature requirement emphasizes personal accountability for engagement partners. Requiring the identification of engagement partners in audit reports would likely have similar effects. Thus, there are both costs and benefits that the PCAOB should consider in making its decision regarding partner identification.
For more information on this study, please contact Chan Li: chanli@katz.pitt.edu.
Carcello, J. V. and C. Li. 2013. Costs and benefits of requiring an engagement partner signature: Recent experience in the United Kingdom. The Accounting Review 88 (5): 1511-1546.
This discussion emphasizes significant caution when interpreting the results of the study. Mainly, it is unclear if results of the study can generalize to the broader public company market in the US. Furthermore, if the results are misinterpreted (i.e., individual auditors are not systematically aggressive but, instead, high quality auditors are systematically assigned the riskiest clients) then regulation requiring audit partner identification could actually have overall negative effects on overall audit quality.
Kinney, W.R. 2015. Discussion of “Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions”. Contemporary Accounting Research 32 (4):1479-1488.
These findings should be of interest to policy makers in China because, among other implications, the results suggest that Chinese regulators should pay attention to the switching of audit partners before they reach tenure limit for mandatory rotation. Partner-level opinion shopping could be more difficult to detect in markets in which the identity of the engagement partner is not disclosed, and it may therefore be prevalent in those markets, such as the United States.
Chen, F., A. Peng, S. Xue, Z. Yang, and F. Ye. 2016. Do Audit Clients Successfully Engage in Opinion Shopping? Partner-Level Evidence. Journal of Accounting Research 54 (1): 79-112.
The authors contribute to the literature on mandatory partner rotation by showing that it has a beneficial impact on audit quality even in the absence of mandatory audit firm rotation. The findings are important given that many countries currently require partner rotation, but not audit firm rotation. The authors infer how mandatory rotation affects audit quality by examining the impact on audit adjustments. The authors contribute to the existing literature on the determinants of audit adjustments by showing that mandatory partner rotation increases the frequency of adjustments during the partner’s final year of tenure and during the replacement partner’s first year of tenure.
Lennox, C. S., Wu, X., & Zhang, T. 2014. Does Mandatory Rotation of Audit Partners Improve Audit Quality? Accounting Review 89 (5): 1775-1803.
Auditor aggressive/conservative reporting style may be a systematic audit partner attribute and non-randomly distributed across engagements. Particular market participants (in this case, lenders) appear to recognize and price these differences in reporting style. While the particular mechanism through which these different reporting styles occur is not possible to determine, the results suggest the importance of individual audit partners in influencing audit reporting decisions. Therefore, current regulations in both the US and EU to identify the individual partner’s identity could potentially offer valuable information to market participants.
Knechel, W. R., A. Vanstaelen, and M. Zerni. 2015. Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions. Contemporary Accounting Research 32 (4):1443-1478.
The conclusions in this paper are relevant to audit firms and audit partners, as both are directly affected by the PCAOB’s proposal to identify partners on the audit report. The paper models the impact of partner identification on the choices of partners on engagements with inconclusive audit evidence, showing that partners are more likely to make decisions that decrease firm profitability in order to reduce the risk of reputational damage. They suggest that this will be more detrimental to large audit firms since the difference between the partner’s share of firm risk and overall firm risk is greater relative to small firms.
Carcello, J., and R. Santore. 2015. Engagement partner identification: A theoretical analysis. Accounting Horizons 29 (2): 297-311.
The study results are important to regulators and audit practitioners as they show the consequences of initial year audit fee low-balling on the performance of the audit. Lower audit quality occurs when an audit firm change includes a change to both audit partners along with a reduction in audit fees. This indicates that retaining one or both of the former audit partners in the new audit firm can offset the reduced audit quality effect in the initial years of the audit engagement.
Huang, H.-W., K. Raghunandan, T.-C. Huang, and J.-R. Chiou. 2015. Fee Discounting and Audit Quality Following Audit Firm and Audit Partner Changes: Chinese Evidence. The Accounting Review 90 (4): 1517–1546.
This study provides useful insights into how audit-partner quality affects engagement-level quality and underscores the importance of audit-partner identification; furthermore, this study could lead to future research which can explore whether audit-partner quality affects the cost of equity and debt capital above and beyond audit-firm and audit-client characteristics with the hopes of deepening the understanding of auditor performance and the market perception of auditor reputation at the audit-partner level.
Wang, Yanyan, Lisheng Yu, and Yuping Zhao. 2015. The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements. Auditing: A Journal of Practice and Theory 34 (3): 81-111.