The Effect of U.S. Audit Partner Identification on Real Earnings Management

Abstract

After a lengthy and protracted debate, the Public Company Accounting Oversight Board (PCAOB) adopted Rule 3211 (commonly referred to as “Form AP”) and related amendments to its auditing standards regarding the identification of audit engagement partner and other accounting firms who take part in a public company audit (PCAOB 2015). The rules require disclosure of the engagement partner’s name and information about other accounting firms on the new PCAOB Form AP, Auditor Reporting of Certain Audit Participants. The PCAOB argued that disclosing audit partner identity would create greater accountability among audit partners, thereby increasing audit quality. Public accounting firms, most notably Big Four audit firms, voiced their dissent to the regulation, expressing doubt about incremental accountability and citing concerns about incremental, partner-specific legal liability. Extant, outcome-based, archival research using accruals as a proxy for audit quality to examine the effect of Rule 3211 on audit quality has produced decidedly mixed evidence. Our paper examines this issue from a different perspective. We examine whether Rule 3211 engendered differential audit partner accruals-based audit behavior, which would, in turn, impact client real earnings management. We find that real earnings management increased in the post-3211 regulatory environment. Our evidence speaks to the effects and unintended consequences of Rule 3211.