Audit Partner Disclosure: Potential Implications for Investor Reaction and Auditor Independence

• In Event: Investor Perceptions

Abstract

We explore potential, unanticipated, effects of a proposed PCAOB standard that would require disclosure of the external audit partner’s identity in the audit report. We examine how investors might react to partner disclosure and explore potential ramifications for audit partners’ reputations, incentives and independence. Specifically, we propose that: (1) partner name disclosure will fuse the individual partner’s reputation with the audit client; (2) this reputation fusing may shift partners’ incentive structures; and, (3) an incentive structure shift has implications for audit partner independence and audit/financial reporting quality. We present experimental evidence to provide support for our first proposition. Specifically, we manipulate the presence or absence of partner disclosure and whether the audit report was modified to reduce investor reaction to partner disclosure. We present experienced investor participants with summary information on several investment options and find that prospective investors are less likely to invest in a peer firm linked to a restating firm via partner disclosure. Contrary to our expectation, the audit report modification language does not appear to alleviate this effect. We perform additional analyses to examine why (and which) investors react this way to partner disclosure. Finally, we provide conclusions that should be of interest to the PCAOB, academics, investors, other regulators, and auditors.

Authors

• Tamara A Lambert, University of Massachusetts Amherst

• Benjamin L Luippold, Georgia State University

• Chad Matthew Stefaniak, Oklahoma State University