Mandatory Disclosure of the Engagement Partner's Identity: Potential Benefits and Unintended Consequences

Abstract

SYNOPSIS: This paper contributes to the deliberations on the potential consequences of requiring disclosure of the engagement partner's identity in the audit report. The PCAOB has recently suggested that this requirement will lead to enhanced audit quality due to increased engagement partner accountability and improved transparency of the audit process. The goal of our commentary is to examine this issue by considering factors that potentially affect audit quality in appearance and audit quality in fact, and applying insights from three distinct academic frameworks: source credibility, accountability, and the theory of affordances.While prior evidence from source credibility research implies that a mandatory signature will likely increase audit quality in appearance, its impact on audit quality in fact remains unclear. Academic literature suggests that increased accountability will increase audit effort but is silent on the associated increase in audit effectiveness. As a result, mandatory disclosure is likely to increase the risk of over-auditing because audit services have the essential characteristics of a credence good. As for an increase in audit quality in appearance, the question remains whether the current perception of audit quality is too low or too high. The increase in public perceptions of audit quality without an associated increase in actual quality is a desirable accomplishment only when public perception of quality is below actual audit quality. Otherwise, the measure increases the gap between delivered audit quality and public perceptions of it. We suggest specific research opportunities in this area.information users seek greater transparency about information source due to a legitimate desire to decrease uncertainty associated with information evaluation. The implication as applied to auditing is that disclosure of the engagement partner's identity will likely increase audit quality in appearance, as well as public confidence in the message content (audit report and associated financial statements). At the same time, greater transparency tempts decision makers to decrease cognitive effort and to rely mostly on the sender's attributes during information processing. The implications are that identifying the EP has the potential to increase the likelihood that investors will place unwarranted weight on the EP's characteristics and underweight the content of the audited financial statements. AccountabilityThis framework, which originated in social psychology, suggests that the positive impact of increased accountability is limited to problems caused by lack of effort rather than by lack of expertise or resources. Accountability-related studies also warn about decision makers' tendency to succumb to the audience's preferences by decreasing effort and independent data processing when reporting to an audience with known views. In an audit context, such a tendency will likely lead to more conservative risk-related judgments and expansive audit procedures, increasing audit costs, but not necessarily au...

Corporate governance of audit firms: Assessing the usefulness of transparency reports in a Europe‐wide analysis

“…Finally, since client firms (majority shareholders appointing the audit firm) and outside investors (minority shareholders with an asymmetry information problem) are different stakeholder groups of audit firms with different expectations, the positive effects of TR may manifest for investors but not for client firms. In particular, while there is empirical evidence supporting the speculation that increased transparency and accountability are likely to increase audit quality in appearance (thus having a positive impact on investor confidence), it is not clear how transparency and accountability requirements will affect audit quality in fact (King, Davis, & Mintchik, ).…”

The effect of audit opinion signature on a jury's perception of negligence

“…France, Germany, and Luxembourg had already adopted an audit partner signature requirement before this directive, whereas the Netherlands and UK put similar regulations in place shortly thereafter (Carcello & Li, ). Opinions as to whether such a requirement would be beneficial are varied, and the research results to date are also split on whether identifying the audit partner has any impact on audit quality (Blay et al, ; Carcello & Li, ; Carcello & Santore, ; King et al, ).…”

“…Others believe that the requirement could lead to extreme conservatism when performing audits (PCAOB, ). Extreme conservatism can lead to overauditing in a way that causes costs to exceed the benefits from additional testing procedures (King et al, ). As to legal liability, firms and engagement partners believe that an audit partner signature requirement could lead to increased legal liability because of the public misunderstanding of the roles of the firm and audit engagement partner in the audit (KPMG, ; PwC LLP, ).…”

“…The PCOAB's call for comments in 2011 regarding its proposal to require the disclosure of the audit engagement partner's identity has been met with comments from both the profession and the academic community (KPMG, ; PricewaterhouseCoopers [PwC] LLP, ; Ernst & Young, ; Carcello & Santore, ). The academic research has focused almost exclusively on the impact such a requirement would have on overall audit quality (Blay, Notbohm, Schelleman, & Valencia, ; Carcello & Li, ; Carcello & Santore, ; King, Davis, & Mintchik, ). However, comment letters from the profession suggested that audit firms were concerned about the impact on legal liability of such a requirement due to the potential public misunderstanding related to the respective roles of the firm and the engagement partner .…”

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

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