Inferring Quality of U.S. Audit Partners through Their Houses

Abstract

We propose a novel measure to discern a U.S. audit partner’s individual effect on audit quality: their houses. We argue that higher house value signals the partners with better performance and more incentives to provide high-quality audits. Using a hand-collected sample of all real estate assets owned by U.S. audit partners, we first document that partners from Big 4 firms, more experienced partners, and partners who audit more and/or larger clients have more valuable houses. More importantly, we find that clients audited by partners with higher house value experience fewer restatements, are less likely to receive comment letters from the SEC, and pay higher audit fees. We conduct several tests to mitigate the client selection concern. Last, we find that the association between a partner’s house value and audit quality is generally stronger for clients with higher litigation risk.