Do Investors Use Audit Partner Identification? Evidence From the KPMG ‘Steal the Exam’ Scandal

Abstract

On April 11, 2017, the Securities and Exchange Commission (SEC) announced charges against KPMG LLP – arising from their participation in a scheme to misappropriate and use confidential information relating to the Public Company Accounting Oversight Board’s (PCAOB) planned inspections of KPMG. The incident was colloquially labeled the KPMG ‘steal the exam scandal.’ We use this setting to investigate if the market finds information concerning individual partner identity useful. Since KPMG withheld the names of the audit partners who were involved in the scandal, the market was unable to distinguish between rotation-induced audit partner turnover and regulatory-related, audit partner terminations. Following information economics models of non-disclosure, we predict that the market would use information about KPMG audit partner turnover as evidence of regulatory-related, audit partner terminations and impose costs on KPMG audit clients who experienced audit partner turnover. The results are consistent with our prediction as KPMG’s overall reputation was not damaged, whereas audit engagements involving audit partners that were potentially involved in the scandal were. In sum, our results suggest that the market finds audit partner identification useful and informative.