Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions

Abstract

This study examines the persistence and economic consequences of variations in reporting style across audit partners in individual engagements. Our results show that both aggressive and conservative audit reporting, measured by the pattern of prior Type 2 and Type 1 audit reporting error rates in auditor‐specific clienteles, persist over time and extend to other clients of the same partner. Analyses of abnormal accruals and persistence of client firms’ accrual estimates corroborate this finding, and hold both for private and publicly listed companies. Further, our results also show that the market penalizes client firms susceptible to aggressive audit partner reporting decisions. In particular, we find that our proxies for aggressive audit reporting are related to higher interest rates, worse credit ratings and less favorable forecasts of insolvency for private client companies, and a lower Tobin's Q for publicly listed client companies. Collectively, these results imply that audit partner aggressive or conservative reporting is a systematic audit partner attribute and not randomly distributed across engagements.

Conservatism in Materiality Judgements: The Effect of Auditor’s Sex and Culture<sup>1</sup>

“…As such they are allowed to undertake audit engagements completely independently and to sign the audit report. Moreover, Knechel et al (2015) not only provide evidence that aggressive or conservative reporting varies systematically across individual auditors but also persists over time.…”

The Effect of National Culture on Auditor-in-Charge Involvement

“…Audit research also demonstrates that reputations partly reside in individual auditors-in-charge (cf. Zerni 2012; see also, e.g., Caramanis and Lennox 2008;Francis and Yu 2009;Reichelt and Wang 2010;Knechel et al 2015). Other studies show that auditor-in-charge ''busyness'' negatively affects audit performance (e.g., Sundgren and Svanström 2014) or find such a negative effect in out-of-equilibrium conditions such as in the 2002 to 2004 accounting crisis (Goodwin and Wu 2016).…”

PCAOB Form AP: Leveraging Information about Audit Personnel

“…Carcello and Li (2013) use data from the United Kingdom and reveal that upon the release of the audit partner identification, client abnormal accruals decline, there is less of a propensity to meet earnings thresholds, and an increase in the incidence of qualified audit reports; in short, identifying the audit partner seems to be associated with improvements in audit quality. Knechel, Vanstraelen, and Zerni (2015) use audit partner data from Sweden and show that audit partner reporting decision preferences are systematic, i.e., that individual partners have unique and recurring patterns, e.g., regarding the going-concern decision. In a similar vein, Gul, Wu, and Yang (2013) use data from China to show how audit partners affect audit outcomes, revealing significant variations in audit quality that can be explained by auditor characteristics such as education, Big N firm experience, rank, and political affiliation.…”