Paper Authors: Daniel Aobdia and Reining Petacchi
Abstract: We investigate the consequences of low-quality audits for engagement partners in the US and the role audit firm quality control systems play in this process. We employ a sample period during which the identity of the engagement partner on specific audits is not publicly known to isolate the effect of quality control systems on partner management. We find that restatements result in partner changes for both restating and non-restating clients. Because the identity of the partner on an audit is not publicly known, non-restating clients may not be fully aware of the restatements associated with their engagement partners. We find that audit firms with ineffective partner quality control systems take advantage of this opaque information environment and do not replace low quality partners, especially if the partners can bring in large audit fees. Even if these audit firms replace the partner, they do not supply a new partner with higher quality. Our results highlight the importance of an effective quality control system in disciplining partners. When audit firm quality control systems fail, enhanced transparency through disclosing the identity of the engagement partner may be necessary in disciplining the auditing labor market.
The economic research fellows and staff economists generate high-quality working papers that inform the oversight activities of the PCAOB and are disseminated to stimulate discussion and critical comment to the benefit of the public. Working papers are preliminary materials that have not been approved by the Board and reflect only the views of the author(s).
The research topics of economic research fellows, including a description of any nonpublic data sets required for research, are presented to the Board for approval and research papers are reviewed to confirm that the topic of the paper is consistent with the researcher's proposal. That review does not, however, encompass an evaluation of the conclusions reached by researchers.