Do School Ties between the Audit Engagement Partner and the Quality Review Partner Help or Hinder Audit Quality?

• In Event: Break and Research & Education Poster Forum

Abstract

We examine whether school ties (alma mater connections) between the engagement partner and the quality review partner help or hinder audit quality. In an engagement quality review, the role of the review partner is to exercise oversight and take an objective second look at the work performed and judgments made by the audit engagement partner prior to issuing a concurring approval of the audit opinion (PCAOB 2009; IAASB 2008). Using discretionary accruals and the likelihood of a modified audit opinion as proxies for audit quality, our results point to school ties between the two signing partners as strengthening audit quality, particularly for high-risk clients. Our evidence suggests that the mutual comfort and trust born of school ties with the review partner helps the engagement partner better resist client pressure to relax constraints on earnings management or to issue a clean (or less severe) audit opinion. Our study contributes to the sparse prior literature on engagement quality reviews as well as to the research stream on individual auditors by pointing to the notion that whether school ties help or hinder audit quality depends on the context, i.e., whether the parties involved have shared interests or conflicting interests. Although our findings are China-based, prior research suggests that friendship (social) ties between economic agents impact decision-making in the US also. Potentially, the PCAOB (2015) could increase transparency and accountability of US public company audits by requiring disclosure of the identity of the review partner in addition to that of the engagement partner.

Authors

• Lele Chen, University of Texas-San Antonio

• Simon Yu Kit Fung, Deakin University

• K. K. Raman, University of Texas-San Antonio