Engagement Partner Visibility, Fee Pressure, and the Effect on Audit Quality

• In Event: Current Issues

Abstract

Using data from Taiwan where audit partner names are disclosed, we investigate why certain engagement partners exhibit a pattern of poor audit quality. We first examine whether this pattern appears to be attributable to the characteristics of the partner’s client portfolio. We find that certain partners exhibit persistently poor audit quality even among a group of clients not involved in a recent restatement and with similar observable risk characteristics, suggesting that the risk characteristics of a partner’s client portfolio are not the sole driver of this phenomenon. Next, we examine whether the visibility of the partner’s recent history of poor audit quality increases audit fee pressures and results in lower audit effort. We find evidence of increased fee pressure among non-restating clients of partners associated with prior restatements. Further tests reveal that the increased likelihood of misstatement among partners associated with prior restatements is attenuated as audit fees increase, and that the increased likelihood of misstatement among the partner’s other non-restating clients is greater only when audit fees are lower. These findings provide further insight into why certain partners exhibit a pattern of poor audit quality and suggest a potential unintended consequence of engagement partner name disclosure. Specifically, when audit partner names are visible, partners with a history of past restatements experience greater client fee pressures, which appears to curtail audit work and results in pervasively lower audit quality.

Authors

• Timothy Andrew Seidel, Brigham Young University

• Ling Lisic, George Mason University

• Wuchun Chi, National Chengchi University

• Linda Ann Myers, University of Tennessee Konxville

• Mikhail Pevzner, University of Baltimore