Does the Disclosure of an Audit Engagement Partner’s Name Improve the Audit Quality? A Difference-in-Difference Analysis

Kose John,Min (Shirley) Liu

doi:10.3390/jrfm14110508

Abstract

On 15 December 2015, the Public Company Accounting Oversight Board (PCAOB) passed Rule 3211, requiring audit firms registered with PCAOB in the U.S. to disclose the audit engagement partner’s name in the Form AP, effective 31 January 2017. The regulation aims to improve the transparency and quality of audits, thereby increasing investors’ confidence in financial statements. Using the audit firms registered with the PCAOB and their clients as the treated sample, we employed a difference-in-difference analysis to investigate whether and the extent to which implementing Rule 3211 impacts audit quality and audit costs. We compared the audit quality (proxied by the abnormal discretionary accruals quality, the probability of restating the financial statements, and the ratio of the audit fees to the total fees) and audit costs (proxied by the total audit fees) from one year (up to three years) pre- to one year (up to three years) post-Rule 3211, to a control sample (comprised of U.K. audit firms, which were not subject to such regulation during the sample period). The empirical results generally indicate that there was an increase in the audit quality and in the audit costs from the pre- to the post-Rule 3211 period and also suggest that auditor independence increased in the post-regulation period compared to the pre-regulation period. Our empirical results are new and contribute to the research on the PCAOB and audits.

Highlights

Published: 21 October 2021In this paper, we investigate the effect of implementing Rule 3211, which requires the audit firm to disclose the audit engagement partner’s name in the Form AP on the audit quality and audit costs
Rule 3211, established by the Public Company Accounting Oversight Board in the United States (U.S.), requires audit firms registered with the PCAOB to disclose certain participants in an audit engagement, such as the audit engagement partner and other audit firms that conducted over 5% of the audit in Form AP on and after 31 January 2017.1 We focus on the effect of disclosing the EP’s name on the audit quality and audit fees because the EP is the one who is mainly responsible for the quality of the audit engagement and the percentage of disclosing other audit participants is a small portion of the filed Form AP.2
We referred to Greene and Liu (2020)’s difference-in-difference analyses when constructing our empirical samples because we investigated a research question testing the effect the treatment (PCAOB Rule 3211) on a treated group

Summary

Introduction

We investigate the effect of implementing Rule 3211, which requires the audit firm to disclose the audit engagement partner’s name in the Form AP on the audit quality and audit costs. Using a novel empirical approach, our study makes several important contributions. We provide new comprehensive empirical evidence on the impact of implementing Rule. 3211 on the audit quality over a long sample period, in addition to its impact over a relatively short period. We were able to document the benefits and costs of implementing. The empirical results of this study address the concern over whether the regulation achieves its goal to promote more

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Conclusion