Engagement Partner Research Articles

Mandatory audit partner rotation and earnings informativeness in the bond market

AbstractThis study finds that mandatory rotation of engagement partners results in more positive earnings response coefficient (ERC) in the years immediately following rotation than in the years that are not. Further analysis reveals that the positive association is driven by firms that announce bad earnings news and for bonds with longer maturity terms. Furthermore, such positive association is stronger when the incoming engagement partner has more industry expertise than the leaving partner, when the audit firm is a non–Big 6 auditor, and when the client firm is small. Finally, the relationship does not exist for voluntary partner rotation.

Audit Partner Characteristics and Their Impacts on Audit Quality: Evidence from around the World

Public company audits are not homogenous. Varying audit partner attributes, including gender, age, location, and expertise, play important roles in explaining audit outcome disparities. The extant literature underscores the influence of firm-level and office-level differences, in areas such as size, culture, and industry expertise, in shaping audit outcomes. Commonwealth countries, such as the U.K., Australia, New Zealand, and Continental European countries, along with Asian economic entities, mandate the disclosure of audit partner names. Consequently, significant research efforts have been devoted to investigating the impact of audit partner characteristics on audit outcomes in these jurisdictions. With the adoption of Public Company Accounting Oversight Board (PCAOB) Rule 3211, mandating disclosure of audit engagement partner details for U.S.-registered public accounting firms on Form AP, there has been a surge in U.S. firm research exploring the significance of audit partner characteristics on audit outcomes in recent years. This paper outlines research that considers audit partner attributes’ influence on audit partner selection and audit quality across different economic entities. This entry contributes by synthesizing findings from recent research across diverse economic contexts, including the recently available insights from U.S.-based audits. The analysis of this entry not only provides insights into the current state of audit partner research but also delineates avenues for future research on this topic.

Partnership Disparity and Audit Quality

This study explores the effects of partnership disparity within Chinese audit firms on audit quality using novel data on their partnership arrangements. The results indicate a U-shaped relationship between the partnership disparity extent and the violations assessed by regulators, including financial misstatements of clients. Audit firms with mid-level unequal partnership structures achieve superior audit quality than their counterparts with either “flat” or “high-skewed” partnership structures. Additional analyses confirm the role of client complexity as the boundary condition and indicate that the geographical remoteness of audit firms asymmetrically moderates partnership disparity. These results are robust to different audit quality proxies and alternative research designs including change analyses and after controlling for the effects of engagement partners. This study contributes to research on diversity and performance in the partnership context. This approach opens the “black box” of power-related culture in audit firms and carries managerial implications for the managing partners and audit regulators of audit firms.

Strengthening the Capability of a micro-scale Bag Producer “Katbag” Through Business Planning & Digital Marketing in the New Normal Era

Micro businesses play a crucial role in Indonesia's economy. Their significance in economic recovery is underscored by their substantial contribution to the labor sector. The community engagement partner, "Katbag," specializes in the production of bags and accessories, also souvenir and corporate merchandise. Partnering with Katbag was motivated by the competitiveness of its offerings and high entrepreneurial drive. However, despite their product excellence, Katbag faces challenges and limitations, particularly in business administration, HR, and marketing. This program aims to assist in enhancing the partner's capacity in terms of business planning and digital marketing so that they can develop their business further. The method involves planning, implementation (training in digital marketing and business administration), along with rigorous monitoring and evaluation. After participating on the program, the partner has gained knowledge in business administration and website management to build digital presence and reach more consumers online.

Corruption and audit fees: New evidence from EU27 countries

This study examines the relationship between country‐level corruption and audit pricing decisions across EU27 countries. Using a sample of 29,607 firm‐year observations for the period 2011–2021, I find that firms headquartered in more corrupt countries pay higher audit fees and have longer reporting lags. I also show that this relationship is stronger after the EU audit reform came into force in 2016. The results suggest that auditors respond to corruption risk stemming from the broader macroeconomic environment by increasing audit fees and audit effort. In additional analyses, I show how the association between audit fees and corruption varies across firm industries, and I document that female engagement partners tend to be more sensitive to corruption risk than their male counterparts. Ultimately, I find unexpected evidence indicating that financial reporting quality, proxied by discretionary accruals, is not adversely affected by corruption. This study addresses prior calls for a more granular understanding of external factors in audit research and provides the first European evidence of the association between corruption and auditor responses. The implications of this study should be particularly relevant for researchers, market participants and regulators.

Audit partner style and financial statement comparability: New evidence from the US market

AbstractWe explore the influence of individual audit partner style on financial statement comparability in a US setting using newly available data. We find evidence of an audit partner style effect on comparability incremental to audit firm and audit office effects. Our results are consistent across several comparability measures and are economically significant. For example, the audit partner effect is associated with a 12.59% decrease in the mean difference in abnormal accruals compared with a 4.4% decrease for firm pairs audited by the same Big 4 audit office. We also find that audit partner expertise and experience have a greater influence on comparability than audit office expertise and experience. Our results are consistent in endogeneity and robustness tests including (1) auditor switching tests, (2) entropy balancing, (3) placebo tests and (4) controlling for clients’ economic similarity. Our results suggest that the association between audit partner style and financial statement comparability persists in highly regulatory environments and corroborate the PCAOB's intuition that the role of the engagement partner “is of singular importance” to the outcome of the audit (PCAOB 2011).

Gender and engagement partner quality

Purpose The purpose of this study is to examine whether the gender of an audit engagement partner (EP) is associated with the quality of the EP’s audit output. Design/methodology/approach This paper defines a low-quality EP as an EP who leads the audit of at least one client firm that subsequently restates its financial statements, while a high-quality EP is an EP that is not associated with any restatement. Using a sample of 6,082 observations from 2016 to 2020, the study estimates a logistic regression of EP quality on EP gender and control variables. Findings The results show that female EPs are more likely to be high-quality EPs. With an odds ratio of 1.25, the results imply that female EPs are 1.25 times more likely to be associated with higher-quality audits compared to male EPs. Research limitations/implications The results of this study imply that female EPs are more likely to perform high-quality audits, and it supports the assertion that EP gender plays a significant role in determining EP quality. Further studies may apply gender theory to investigate the behavior of female EPs. Practical implications The results show that female EPs are more likely to be high-quality EPs. With an odds ratio of 1.25, the results imply that female EPs are 1.25 times more likely to be associated with higher-quality audits compared to male EPs. Originality/value The results of this study should be of interest to stakeholders such as audit committees, regulators, investors and creditors, as they provide an indicator for assessing the quality of audits. Moreover, considering the EP’s important role in an audit, the current study extends the existing literature by providing evidence of a relationship between EP gender and EP quality.

The effects of audit engagement partner ownership on audit engagements: evidence from Korea

ABSTRACT We examine the relationship between the partnership share ratio of audit engagement partners and 1) audit fees and billing rates, 2) engagement team size, and 3) audit quality. Based on data from Korea for the period 2018–2020, we find that audit engagement partners’ partnership share ratio is positively associated with audit fees and billing rates, and negatively associated with engagement team size. Furthermore, the association is more pronounced for engagement partners at Big4 accounting firms. However, we do not observe any association between partnership share ratio and audit quality. This study extends the limited empirical studies examining the effect of profit-sharing in accounting firms on engagement decisions, and nicely answers the call for more research on profit-sharing in accounting firms. Moreover, this study offers insight to policy-makers interested in what incentivizes audit engagement partners in making audit fee and engagement team decisions. 1

Audit Engagement Partner Ideology, Ideological Homophily, and Audit Quality

Audit Engagement Partner Ideology, Ideological Homophily, and Audit Quality

The Importance of Conscientiousness to Audit Quality: Engagement Partner Graduate Thesis Typos and Audit Adjustments

The Importance of Conscientiousness to Audit Quality: Engagement Partner Graduate Thesis Typos and Audit Adjustments

Can Institutional Constraints Curb Innate Personality Traits? A Study of Audit Engagement Partners

Can Institutional Constraints Curb Innate Personality Traits? A Study of Audit Engagement Partners

Partner narcissism in a private market setting: Consequences for audit reporting decisions and audit pricing

This study investigates the association between audit engagement partners' narcissism (measured by the size of their signature) and audit reporting decisions and audit pricing in a private market setting. We analysed 133,267 (78,994) firm‐year observations from (financially distressed) Belgian firms audited by 795 individual engagement partners from 2008 to 2017. Our results suggest that narcissism is positively associated with the likelihood that audit partners issue going‐concern opinions to their financially distressed clients and with audit fees. An array of robustness checks corroborates these results. Additional results show that audit partner narcissism is positively associated with reporting conservatism. Interestingly, additional analyses also show that narcissism reverses the effect of gender on audit reporting decisions and audit pricing. Collectively, the evidence from this study suggests that partner narcissism is positively associated with conservative audit reporting decisions and audit pricing in a private market setting.

Accounting reporting complexity, audit engagement partner mandatory rotation, and audit quality

AbstractThis paper investigates the influence of a firm's accounting reporting complexity (ARC) on financial statement audit quality. We predict and find that there is a non‐linear relationship between a firm's ARC and audit quality. Specifically, a more complex accounting environment—measured by ARC—leads to higher quality audits, but this effect diminishes when ARC continues to increase. Further analyses reveal that the effect is more salient among client firms that do not purchase non‐audit services (NAS). We also examine whether ARC affects audit quality in the circumstance of mandatory audit partner rotation. Empirical results show a moderating effect of ARC on the negative influence of audit partner rotation on audit quality. Our study extends the literature by illustrating how a firm's ARC influences audit quality in a special manner.

The auditing game: the dark side of the private provision of a public good

AbstractThe aim of auditing is to protect active and potential investors from accounting fraud. Nevertheless, as many auditing scandals have demonstrated, auditing has a dark side. Correct auditing is a public good provided by private auditing firms, but these firms are paid by the enterprise being audited. Therefore, audit firms may be dubbed as agents of two principals, the audited firm and the public. Reputation theory conjectures that auditors are disincentivized from performing shallow and fraudulent auditing because of reputational concerns and associated reputational costs. However, empirical evidence does not support this claim. While it may be irrational for a large audit firm (such as Arthur Andersen LLP) to sacrifice its reputational capital for a single client by doing superficial audits (such as WorldCom), it may be quite rational for the auditing firm’s engagement partners to do so. The result might be a conspiracy against the public and investors. Because of an inelastic supply of experienced auditors and a highly concentrated market of big auditing firms, reputational losses due to auditing scandals for the audit firms’ local partners and staff seem to be rather small. With a game theoretic model, we argue here that neither higher transparency nor higher fines for auditing failures may prevent such conspiracies. Therefore, legal regulations and court rulings can only change the expected fines for audit fraud, but they cannot solve the general problems arising from the symbiotic relationship between auditors and their client firms. As auditing firms may use the so-called expectation gap to protect themselves against legal claims of wrongdoing, avenues more suitable to deterring conspiracies by auditors and their client firms might include whistleblowing, short-selling investors and investigative journalism.

James R. Doty, PCAOB Chairman: 2011–2018

ABSTRACT James R. Doty led the PCAOB from 2011 to 2018. His tenure began shortly after the PCAOB withstood a constitutional challenge to its existence and in the aftermath of the Great Recession. Under his leadership, the PCAOB expanded the international reach of its inspection program through co-operative agreements with foreign regulators, the auditor’s reporting model was enhanced to provide more information to investors, and information about the engagement partner and other firms involved in audits are now required to be disclosed. Doty also brought economic analysis to bear on the PCAOB’s standard-setting process. Before Doty was appointed to the PCAOB, he was a Rhodes Scholar, a graduate of Yale Law School, a partner in the international law firm of Baker Botts, and General Counsel at the Securities and Exchange Commission.

Risk and Control Considerations in Attestation Engagements: The Auditor’s Role in the Academy Awards

ABSTRACT This case introduces students to engagement planning, risk management, independence, and execution in the setting of attestation engagements by examining the auditor’s role in the Academy Awards (also “the Oscars”). Specifically, this case focuses on an error made by PwC during the 89th Academy Awards ceremony in 2017, which resulted in the announcement of the wrong “Best Picture” winner (“the error”). Students are required to research attestation engagements and the AICPA Code of Professional Conduct, analyze the benefits and risks associated with the Oscars engagement, evaluate the controls that were in place, and think critically about what additional control considerations may have prevented the error. Finally, students are asked to assess the potential consequences of this error for the engagement partners, the firm, and its clients. The visibility of this error is a unique opportunity to evaluate the roles and responsibilities of accountants in practice.

The importance of audit partners' risk tolerance to audit quality

AbstractRelying on their history of legal infractions to measure individuals' risk tolerance, we examine the association between engagement partners' risk appetites and audit quality in the United States. Criminology and economics research links infraction activity with enduring personality traits that capture an individual's risk tolerance. Our evidence supports the prediction that partners known to engage in risky off‐the‐job behaviors conduct lower quality audits. Specifically, we find that clients of partners with prior legal infractions exhibit a higher likelihood of material misstatements revealed through subsequent restatements, greater propensity to misstate based on the F‐score, more instances of “missed” material weaknesses, and less timely loss recognition, while also paying lower audit fees. In cross‐sectional results consistent with expectations, we generally find that the impact of partners' risk tolerance on audit quality is more heavily concentrated in clients of non–Big 4 firms and offices without industry expertise. Collectively, our analysis contributes to emerging research on the role that individual partner characteristics play in shaping audit outcomes.

Audit engagement partner ideology, ideological homophily, and audit quality

AbstractPrevious studies have shown that audit quality is influenced by the audit engagement partner's characteristics. Extending this literature, we examine the association between audit engagement partner ideology (i.e. conservatism) and audit quality. We find that clients whose audit engagement partners are ideologically more conservative receive higher quality audits, as indicated by lower discretionary accruals than clients with less conservative auditors. Additionally, we find evidence that the relation between the auditor's ideology and that of the client's executives influences audit quality, as does the ideological homophily between the auditor and the client's audit committee. Homophilous pairings between the audit engagement partner and the client's executives, where the two parties share a similar ideology, are associated with both higher discretionary accruals and higher probabilities of restatement. Discretionary accruals are also shown to be higher when engagement partners share an ideology with their client's audit committee. We interpret these results as evidence of less effective monitoring by the engagement partner when they share political views with their clients.

The effects of accounting comparability, income smoothing and engagement partners on audit risk

This study investigates whether accounting comparability, income smoothing and engagement partners affect audit risk perceived by auditors. We find that both accounting comparability and income smoothing reduce perceived audit risk and that the interaction of these two variables incrementally reduces perceived audit risk. We also find that the interaction of accounting comparability and income smoothing incrementally reduces perceived audit risk when engagement partners exert more effort in auditing. The results imply that when clients exhibit both cross‐sectional and the time‐series informativeness of financial statements, auditors lower their perceived audit risk and reduce risk premium, which decreases deadweight cost to these clients. This is especially the case when engagement partners exert more effort in auditing. To the best of our knowledge, this is the first empirical study to test the interaction effect of accounting comparability, income smoothing and engagement partners on perceived audit risk.

Does gender and ethnic diversity among audit partners influence office‐level audit personnel retention and audit quality?

AbstractMotivated by prior literature on organizational identification and 23 semistructured interviews with a variety of US audit partners and directors, we examine whether the gender and ethnic diversity of an office's audit partners influences the retention of the office's audit professionals and the quality of the audits conducted by the office. Using hand‐collected data on US audit partners, we find that greater levels of (or changes in) diversity in office audit partners' gender and ethnicity are associated with lower (reduced) turnover among office audit professionals and higher (increased) office‐level audit quality. We conduct a path analysis based on the most common mechanisms highlighted in our interviews to provide further insight into the audit quality results. The results indicate partial mediation through increased retention, greater gender and ethnic diversity among office audit personnel, client continuity, and increased efficiency. Further tests reveal that the association with audit quality is incremental to, and distinct from, the effect of individual engagement partner characteristics and does not reflect client screening. The findings underscore the importance of gender and ethnic diversity among office audit partners to organizational outcomes and provide important practical implications for audit firms.