Escalating Commitment and Restatements: Potential Unintended Consequences of Partner Signature

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Abstract

This paper explores the impact of audit partner signature on the propensity to restate misstated financial statements. We conduct an experiment in which an audit partner learns of a potential error in previously issued financial statements, to which he/she attested as the lead audit partner. We place respondents into three audit report scenarios related to the original opinion – the partner signed the audit firm name (firm signature), the partner signed the audit firm name but the audit partner name is disclosed separately (partner disclosure), and the partner signed his/her own name (partner signature). Escalating commitment would suggest that partner signature on an audit opinion might lead to a lower propensity to correct, and restate, a previous period’s misstatements; however, other concerns, such as litigation, may lead to an increased likelihood of restatement. To further isolate the potential effect of escalating commitment, we manipulate the source of the original (misstated) audit opinion as escalating commitment would only apply to an original decision made by the partner (versus an opinion signed by another partner at the firm). This experiment hopes to provide evidence on the effect of partner signature on restatements and to inform policy makers as to potential unintended consequences of recent regulations.

Authors

• Emily Seay Keenan, Ohio University

• Jennifer Lynn Sustersic Stevens, Ohio University

• Aaron Wilson, Ohio University