Do Office Managing Partners Influence Audit Quality?

How Do Audit Offices Respond to Audit Fee Pressure? Evidence of Increased Focus on Nonaudit Services and their Impact on Audit Quality

“…The authors suggest that the complexities and incentives surrounding the provision of NAS are important to consider when reconciling some of the mixed and insignificant results in prior studies. Mowchan () examines the background of audit office managing partners and finds that NAS fees increase when an office changes its leadership to an advisory office managing partner compared to other lines of service, suggesting that office‐level leadership can affect the focus on selling NAS. Francis (, 749) also notes, “the analysis of auditor independence requires a more comprehensive analysis of incentives and the institutional setting in which audit contracting takes place.” By testing the effect of audit fee pressure on a shift in focus to NAS at the office level, and their combined effect on audit quality, our study examines an additional setting where the complexity and incentives surrounding the contracting and provision of NAS are important.…”

“…1 NAS are typically high-margin activities, and because partnerships often share profits among partners (Burrows and Black 1998;Liu and Simunic 2005;Maydew and Shackelford 2007), an increase in profits from NAS could help subsidize the loss in profitability of audit engagements for the audit partner. 2 Research suggests that audit office leadership can affect the culture of the office (Pratt and Beaulieu 1992;Mowchan 2016;Aobdia 2017;Lennox and Wu 2018), and focus on NAS or advisory services can affect the behavior of audit partners, potentially reducing the focus on audit quality.…”

“…A shift in strategic focus in an office could happen for a variety of reasons, including changes in the business goals by the managing partners of the office (e.g., Mowchan ). We cannot observe specific managing partners in an office or a change in their business goals, but we suggest that increases in audit fee pressure could be one reason for the shift in strategic focus.…”

“…Most prior studies examine the level of NAS provided at the audit client level. However, Mowchan () examines whether office managing partners emphasize selling NAS. Lisic et al () examine the proportion of management advisory and other fees to total U.S. revenue at the accounting firm level, and Chyz et al () examine both engagement‐level and office‐level tax compliance and planning services.…”