Consequences of Low-Quality Audits for Engagement Partners

• In Event: Auditors' human capital and labor markets

Abstract

We use unique datasets to investigate the consequences of low quality audits for engagement partners in the US. We find that whether clients change their engagement partners associated with low quality audits depends critically on the visibility of the audit incidents. Highly visible audit incidents such as restatements result in partner changes for both restating and non-restating clients. By stark contrast, audit incidents that are not publicly disclosed, such as engagement deficiencies identified by the Public Company Accounting Oversight Board (PCAOB) inspection program, do not lead to any partner turnover, even for the inspected clients. Additional analyses suggest that due to the opaque information environment in the auditing labor market, clients rely on self-disclosure from the audit firms to identify audit incidents associated with their engagement partners. Our results speak to the importance of disclosing the identity of the engagement partner in the audit report and the identity of the engagement being inspected by the PCAOB.

Authors

• Daniel Aobdia, Northwestern University

• Reining Petacchi, Georgetown University