More than Just a Name: The Impact of a Star-Quality Rating System for Audit Partners on Investor Decision-Making

• In Event: Audit and advisory effects on investors and managers

Abstract

Investors have long expressed dissatisfaction with the level of transparency regarding the external audit. In response, the Public Company Accounting Oversight Board now requires audit firms to disclose the identities of engagement partners for all publicly-traded companies. Drawing on source credibility theory, we explore whether the information contained in Form AP affects the investment choices of professional and non-professional investors. First, due to practitioner concerns that partner identification may lead to the creation of a “box score” or “star-rating” for individual audit partners, we consider investor sensitivity to a star-rating system and find that investors are less likely to invest in a company audited by an audit partner with a lower rating, even when the company outperforms competing investment choices. Second, we consider investor sensitivity to information about an audit partner’s industry expertise, an indicator of credibility. Contrary to prior literature that has demonstrated the importance of firm specialization to the market, we do not find evidence to suggest that the individual audit partner’s expertise affects investment choices. We contribute valuable insights to the literature and to practice about a future where the quality of an individual auditor may be reduced to a number of stars and provide evidence that the implications of Form AP extend beyond the audit partner’s name.

Authors

• Erin Burrell Nickell, Stetson University

• Tyler Williams, Bentley University

• Jared A Eutsler, University of North Texas