The Effect of Form AP on Auditor Liability when Engagement Partner Disclosure Shows a History of Restatements

Abstract

Engagement partner disclosures required by the new Form AP allow litigants to associate audit engagement partners with both current and past restatements. We investigate how knowledge of a partner's history of restatements, along with audit firm interventions following poor audit quality, impact audit firm liability in litigation stemming from a partner's second, unrelated client restatement. Interestingly, we do not find that a partner's association with a current and past restatement, alone, increases audit firm liability. However, we do find that jurors interpret firm interventions intended to restore audit quality as indicators that the partner contributed to the second audit failure and that audit firm oversight was inadequate. Specifically, we find that both requiring a probationary engagement co-partner after an initial restatement and partner dismissal after a second restatement individually increase juror assessments of audit firm liability. Collectively, our findings represent a Catch-22 of Form AP engagement partner disclosure, whereby audit firm interventions to restore audit quality are expected by regulators, but can increase auditor liability in subsequent litigation settings.