AAA Spark Meeting of the Regions

Capital Market Consequence of Engagement Partner Identity Disclosure

• In Event: Audit Quality, Disclosure, & Liability

Abstract

Abstract
We posit that restatement announcements that result in a downward revision of earnings signal
low monitoring quality of the audit engagement partner (EP) and that can have a contagion effect
on other non-restating client firms (interlocked firms) of the EP. Consequently, we predict that
this contagion effect will cause investors to be skeptical about the quality of the financial reports
of the interlocked firms, inducing a negative stock price reaction around the event window.
Consistent with our predictions, we find that the cumulative abnormal returns of contagion firms
are on average, 1.61 percent lower than that of non-contagion firms in the three days surrounding
the announcement. Overall, our results are consistent with a contagion effect of restatements
through shared EPs.
Keywords: PCAOB, rule 3211, audit engagement partner, engagement partner interlock,
restatements, audit quality, financial reporting, form AP

Authors

• Nana Yamfo Amoah, Rollins College

• Alex P. Tang, Morgan State University

• Muni Kelly, Bryant University