AAA Spark Meeting of the Regions

The Impact of Audit Partner Quality on Client Firms’ Risk Factor Disclosures in Items 1A and 7

• In Event: Auditor Quality

Abstract

This paper examines whether and how individual audit engagement partner quality is associated with client firms’ risk factor disclosures (Items 1A and 7) in the annual reports (10-K filings). Specifically, I investigate whether engagement partner quality is associated with the tone and sentiment in the risk factor disclosures, as well as the disclosure of financial and tax-related risk factors. I find that clients with high-quality engagement partners use an overall negative tone in the narrative disclosures in Item 1A and Item 7. Further, I find that high-quality engagement partners are specifically associated with a “negative, litigious, or uncertain” tone, suggesting that high-quality engagement partners constrain managements’ tendency to use overly positive tone in the risk disclosures. Finally, I find that engagement partner quality is positively and significantly associated with financial and tax-related risk factor disclosures. These results shed light on the critical role that audit partners play in the formation process of client firms’ risk factor disclosures in 10-K filings.

Author

• Han Dai, University of South Florida