Audit Partner Identification Research Articles

Audit partner identification, matching, and the labor market for audit talent

AbstractConventional wisdom suggests that audit engagement partner name disclosure benefits investors by informing them about the partners' performance. However, such public disclosure of the identity of the audit partners may also intensify competition for audit talent in the labor market. To examine the economic consequences of audit partner identification, we build a two‐period model in which an audit firm matches partners to clients. The audit partner identification broadens a partner's outside options in the labor market, making talent retention more costly. If the talent‐retention cost is substantial, audit partner identification may cause an audit firm to adjust its partners' compensation packages and mismatch the partners and clients, which may lead to lower audit quality. Overall, we identify unintended consequences of audit partner identification by examining its impact on the audit labor market, and we provide economic reasons for the mixed empirical findings.

Is Audit Partner Identification Useful? Evidence from the KPMG “Steal the Exam” Scandal

SUMMARY On April 11, 2017, the Securities and Exchange Commission charged KPMG with using confidential information relating to the Public Company Accounting Oversight Board’s planned inspections of KPMG. The incident was colloquially labeled the KPMG “steal the exam scandal.” We use this setting to investigate whether the market finds information concerning individual partner identity useful. Since KPMG withheld the names of the audit partners 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 nondisclosure, we predict 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. Data Availability: All data was obtained from publicly available sources. JEL Classifications: M42; M48.

U.S. Audit partner identification and auditor reporting

After a lengthy and protracted debate, the Public Company Accounting Oversight Board (PCAOB) adopted new rules requiring 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. We investigate the impact of this regulation on auditor behavior in the context of the auditor’s going concern report modification propensity. We document an increase in the propensity to issue a going concern report modification in the disclosure regime, accompanied by a corresponding increase in the Type I (‘false positives’) error rate. Thus, an unintended consequence of Rule 3211 is the potential reduction in the audit report's informativeness. Conceivably, a more significant repercussion is that going concern modifications can hasten bankruptcy for firms since financial institutions may be reluctant to lend money to firms with modified audit reports. An unjustified increase in the going concern modification rate as evinced in our paper may make U.S. capital markets potentially less attractive to young, upstart, albeit financially-distressed, companies.

Audit partner identification and audit quality

This paper studies the effects of disclosing the audit engagement partner’s identity on individual and partnership incentives and overall audit quality. We model a collective decision problem, incorporating individual engagement partners’ preferences with the partnership’s choice of internal quality control. In our model, disclosure of the individual engagement partner (on Form AP) influences the probability that clients observe individual partners’ past performance. While Form AP disclosure increases individual partners’ incentives to provide high-quality audits for a given level of internal quality control within the partnership, it may simultaneously decrease the partnership’s incentives to maintain good internal quality control systems, leading to a net degradation in audit quality. Our paper also demonstrates that the level of external audit oversight is critical in determining whether Form AP disclosure enhances audit quality.

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

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.

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

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.

Audit Partner Identification, Assignment, and the Labor Market for Audit Talent

Conventional wisdom suggests that partner identification disclosure can improve audit quality, because it may enhance transparency and individual accountability. Building on a two-period assignment model, we show that under certain conditions, the disclosure can distort partner client assignment because the disclosure can inform the labor market for audit talent. In a decentralized assignment regime in which partners directly bid for clients, we find that the disclosure may give rise to low-balling in the first-period, because partners aggressively lower the audit fees to maximize their career advancement. In a centralized assignment regime in which an audit firm assigns partners to clients, audit firms may distort the assignment in order to dampen partners' career advancement. We also find that in the presence of mandatory partner identification, the optimal partner-client assignment regime depends on the distribution of partners' reputations within an audit firm. Overall, our findings identify unintended consequences of audit partner identification disclosure and provide economic reasons for the mixed empirical findings.

Initial Evidence of U.S. Audit Partner Identification in Form AP Shows Limited Impact on Audit Quality

SUMMARY This article summarizes a study (Cunningham, Li, Stein, and Wright 2019) in which we examine the initial impact of Form AP partner disclosure on audit quality. One difficulty with studying the effect of Form AP is that general time trends likely occurred even in the absence of partner disclosure. Our study addresses this concern by comparing two groups of audits: those experiencing partner name disclosure for the first time (treatment) and those not subject to the same shock (control). If Form AP was effective at driving immediate improvement in audit quality, any change for the treatment group should be greater than the control group. We conclude that audit quality appears to improve year-over-year; however, significant differences do not exist between these two groups in most of our tests, suggesting that partner disclosure does not explain these general trends. Further research is necessary to evaluate other potential impacts of Form AP.

PCAOB Form AP: Leveraging Information about Audit Personnel

SUMMARY The PCAOB's Form AP (audit personnel) includes the identity of the engagement partner, an indication of whether the audit report is dual-dated, and an indication of whether and to what extent other auditors participate in the engagement (in addition to the primary auditor). We review the nature of this information and prior literature relevant to audit partner identification, dual-dating, and involvement of other auditors as part of distributed audits, along with posing research questions and providing relevant instructional resources. Practitioners can use this information to garner insights from academic research on these important topics as they relate to their own audits. Academics can use this information to leverage the PCAOB's Form AP database in their research. Academics can also use the brief teaching resources to introduce the PCAOB's resources in this regard to students.

Audit Partner Identification and Audit Quality

Audit Partner Identification and Audit Quality

Audit Partner Identification and Characteristics: Evidence from U.S. Form AP Filings

SUMMARY This paper investigates the overall impact of and the information made available by the recent audit partner disclosure requirement in the U.S. After a contentious comment period, the PCAOB released Rule 3211, which requires registered public accounting firms to disclose the name of the audit partner for every audit report it issues. In the first year of adoption, we find a significant increase in audit quality and audit fees and a significant decrease in audit delay. We collect information on partner gender, busyness, education, and social connections to explore whether these newly observable characteristics are associated with audit outcomes. We find that several of these characteristics are associated with variations in audit fees and audit delay, but no evidence of an association with audit quality. Overall, our findings suggest that the disclosure of partner name in Form AP enhances the audit information environment, which supports PCAOB motivation for Rule 3211.

What's in a Name? Initial Evidence of U.S. Audit Partner Identification Using Difference-in-Differences Analyses

ABSTRACTWe investigate changes in the quality and cost of audit services surrounding PCAOB Rule 3211, which requires disclosure of audit partner names in Form AP. To isolate changes due to Rule 3211 from other confounding factors, we use difference-in-differences analyses with separate control groups, including a group of companies that disclosed partner identities prior to Rule 3211. Our study also incorporates several measures from prior literature to proxy for various dimensions of audit quality. Evidence from the difference-in-differences analyses reveals that any immediate impact of Rule 3211 on audit quality or fees is limited to specific dimensions of audit quality, specific control groups, and/or specific company characteristics. We reach this conclusion after considering alternative research designs and evaluating confidence intervals for statistically insignificant coefficients. We caution that our findings only provide initial evidence and further research is necessary to evaluate other potential impacts of Rule 3211.

Whatts in a Name? The Impact of U.S. Audit Partner Identification on Going Concern Audit Report Modifications

After a lengthy and protracted debate, the Public Company Accounting Oversight Board (PCAOB) adopted new rules and related amendments to its auditing standards regarding the engagement partner and other accounting firms that took part in the audit (PCAOB 2015). The rules require disclosure of the engagement partner’s name and information about other accounting firms on new PCAOB Form AP, Auditor Reporting of Certain Audit Participants. We investigate the impact of this regulation on auditor behavior in the context of the auditor’s going concern report modification propensity. Consistent with a perceived increase in litigation risk, we document an increase in the propensity to issue a going concern report modification in the disclosure regime. Our results are sensitive to auditor type. Specifically, only Big Four auditors exhibit an increase in the going concern modification rate. Our evidence is consistent with Big Four audit partners believing that audit partner identification exposes them to higher litigation risk.

Audit Partner Identification: Early Evidence from U.S. Form AP Filings

This paper investigates the overall impact of and the information made available by the recent audit partner disclosure requirement in the U.S. After a contentious comment period, the PCAOB released Rule 3211, which requires registered public accounting firms to disclose the name of the audit partner for every audit report it issues. In the first year of adoption, we find a significant increase in audit quality and audit fees and a significant decrease in audit delay. Furthermore, we collect information on partner gender, busyness, education, and social connections to explore whether these newly observable characteristics are associated with audit outcomes. We find that several of these characteristics are associated with variations in audit fees and audit delay, but no evidence of an association with audit quality. Overall, our findings suggest that the disclosure of partner name in Form AP enhances the audit information environment, which supports PCAOB motivation for Rule 3211.

New audit partner identification rules may offer opportunities and benefits

From the WorldCom and Enron accounting debacles that triggered the demise of Arthur Andersen to Ernst & Young’s 2013 and 2015 settlements of claims that its audits facilitated massive accounting fraud by financial services firm Lehman Brothers, large-scale financial scandals have led to increasing scrutiny of public auditors. Investors are justifiably eager to ascertain the quality of audits of public companies when making investment decisions. In the U.K., the reputation of the audit partner is recognized as a signal of audit quality, and as such, the names of the lead partners have been disclosed to the public since 2009. The U.S. standard of providing the auditing firm name without identifying the lead partner recently changed to match the U.K. and EU standard after much debate. As of May 2016, the Public Company Accounting Oversight Board has adopted—and the Securities and Exchange Commission has approved—new regulations that will require the public disclosure of the individual audit partner responsible for each public company audit, as well as the identification of any additional accounting firms that contribute to the audit. This article examines the new rules in light of disclosure requirements imposed on other professionals, as well as international auditor disclosure requirements. The accounting profession has generally opposed the new disclosures, but this article suggests opportunities and benefits for the profession as a result of the changes, including the opportunity for audit partners to develop individual reputations for quality and specialization. In addition, this article makes recommendations for business managers, owners, and investors for making the best use of the information the new disclosures will provide.

Audit Partner Identification: Unintended Consequences on Audit Judgment

SUMMARYWe examine the impact of partner identification, a regulation proposed by the PCAOB and contested by the audit profession, on audit partners' judgments. Based on accountability theory (e.g., Lerner and Tetlock 1999) and professionalism literature (e.g., Hall 1968; Adler and Kwon 2013), we conduct an experiment in which we manipulate partner identification at three levels (i.e., no identification, disclosure identification, signature identification) and ask 83 partners to make inventory writedown assessments and other judgments underlying their decision making. We find that, contrary to the PCAOB's stated purpose of enhancing audit quality, and consistent with the professionalism literature, partner identification—in the form of either disclosure or signature—yields more aggressive writedown judgments through its negative impact on partners' self-reported measures of commitment to the profession and, in turn, commitment to the public. This result suggests that regulators should consider possible unintended consequences of accountability-inducing regulations.JEL Classifications: C91; M42; M48.

Audit Partner Identification and Audit Quality

This paper studies the effect of identifying the engagement partner of an audit on audit quality using an analytical model that focuses on individual partners' incentives and the partnership's choice of internal quality control. The model evaluates two distinct information settings: one where clients can observe only the partnership's past audit performance and the other where clients can also observe individual partners' past performances. Comparing the model outcomes between the two settings, the analysis shows that while partner identification increases individual partners' incentives to provide high quality audits for a given level of internal quality control within the partnership, it may also decrease the partnership's incentives to maintain good internal controls that actual audit quality suffers. This paper also shows that the level of external audit oversight is critical in determining whether partner identification enhances audit quality.

A discussion of public identification of US audit engagement partners: Who benefits? Who pays?

The Public Company Accounting Oversight Board has issued a Concept Release, which would require audit engagement partners of US publicly traded companies to be identified by signing their firm's audit reports. In this article, we attempt to identify who would benefit from – and who would pay for – identification of audit engagement partners. We do this by summarizing the commentary of responders on the Concept Release, comparing the Concept Release to provisions contained in the Sarbanes–Oxley Act of 2002, examining arguments for and against identifying the audit engagement partner, and summarizing the likely impact of adopting the Concept Release. We conclude that, if adopted, it is unlikely that audit partner identification would enhance audit quality. Further, the cost of additional audit and/or quality control procedures associated with implementation will likely be borne by companies and their shareholders.