Does the Identity of Engagement Partners Matter to the Market? Evidence from the Prior Audit Reporting Failures

• In Event: Partner-Specific Audit Effects

Abstract

This study examines the persistence and economic consequences of engagement partner reporting failures. Our results show that both aggressive and conservative audit reporting, which are measured by the frequency of historical Type 2 and Type 1 audit reporting error rates, respectively, persist over time and extend to other audits. Analyses of the earnings properties of client firms corroborate this finding. Importantly, our results show that the market penalizes client firms from the suspected low-quality audits. In particular, we find that the extent of engagement partner prior reporting failures is related to higher interest rates, worse credit ratings and less favorable forecasts of insolvency. Collectively, we provide evidence that engagement partner prior reporting failures are reflective of the auditor’s “style” and the quality of audits that he or she will perform in the future. These results imply that the engagement partner identity affects audit quality and matters to the market, which would support the recent initiatives of regulators to disclose the name of the engagement partner in the audit report.

Authors

• Mikko Zerni, University of Vaasa

• Ann Vanstraelen, Universiteit Maastricht