Recent Studies make a Case for Requiring Audit Engagement Partner Identification in Audit Report

Friday, November 15, 2013 Print Email

Three recent research studies have made a case for identification of audit engagement partner in the audit report. The Public Company Accounting Oversight Board (PCAOB) is expected to discuss this issue in the coming months.

These research studies aimed to find out whether the disclosure of the name of the engagement partner is valued by the users of financial statements and whether the performance of the engagement partner improves by mandating the disclosure of their name. The PCAOB might take into consideration the findings of these studies and decide to reexamine a proposal that requires disclosure of the name of the audit engagement partner in the audit report. The proposal may also require disclosure of names of other accounting firms and other person who participate in the audit but who were not employed by the auditor.

The first research study was presented at the annual conference of the Canadian Academic Accounting Association. The study analyzed the audits performed by the Swedish subsidiaries of the Big Four accounting firms over a period of seven years. The study concluded that:

- conservative or aggressive audit reporting was associated with the particular audit engagement partners and above any influence of the firm that employed them

- individual differences in reporting style persist across clients and over time

- the individual engagement partners had significant effect on the credit ratings of the clients and assessment of investors

W. Robert Knechel, a professor at Fisher School of Accounting, editor of Auditing: A Journal of Practice and Theory, and co-author of this study said that "A firm audited by an engagement partner who is consistently aggressive is more likely than other companies – other factors being equal – to be penalized through higher interest rates, lower credit ratings, and greater perceived likelihood of insolvency. If the company is public, it is also likely to be penalized by a lower Tobin's Q – a measure that reflects investor approval of a firm and optimism about its prospects. In short, we find that the reporting differences of lead auditors have a significant effect on both the lending and equity markets."

Source: ReadyRatios

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