Do Client Firms Benefit from Mandatory Engagement Partner Signature?

• In Event: Auditing Engagement Partners

Abstract

We investigate the effects of mandating the audit engagement partner (EP) signature on client firms and their information environment, by examining the change in their cost of capital (cost of debt as measured by bond yields, and cost of equity capital, measured by the PEG ratio), and firm value (measured by Tobin’s Q). We use data from pre- and post-EP signature reform effective April 2009 in the United Kingdom (UK) to evaluate these changes. From the pre- to post-signature period, we document a significant increase in Tobin’s Q of the client firms and a significant decline in the cost of debt and equity. Consistent with our theoretical arguments, we also find these effects to be lower for the clients of the Big 4 auditors (versus non Big4 auditors). Again consistent with our theory, we find the changes to be significantly larger for more opaque client firms, and smaller firms. These findings are robust to using a control sample approach and first-differencing method, which implies that our results are not likely due to the effects of concurrent events and correlated omitted variables. While our results provide support to the Public Company Accounting Oversight Board (PCAOB)’s controversial decision to mandate the disclosure of the EP’s name in the US, it also suggests the need for large audit firms to strengthen auditors’ incentives to monitor one another.

Authors

• Min Liu, Brooklyn College

• Kose John, New York University

• Jayanthi Sunder, University of Arizona