Engagement partner identification format and audit quality

• Published date: 01 January 2024
• Author: Jean Bédard,Carl Brousseau,Louis‐Philippe Sirois
• Date: 01 January 2024
• DOI: http://doi.org/10.1111/ijau.12315

ORIGINAL ARTICLE

Engagement partner identification format and audit quality

Jean Bédard | Carl Brousseau | Louis-Philippe Sirois

School of Accounting, Laval University,

Quebec City, Quebec, Canada

Correspondence

Carl Brousseau, School of Accounting, Laval

University, 2325, rue de la Terrasse, bureau

2535, Quebec City, Quebec G1V 0A6, Canada.

Email: carl.brousseau@fsa.ulaval.ca

Funding information

Laval University's Corporate Governance Chair

(Chaire de recherche en gouvernance de

sociétés); CPA of Quebec Foundation

Exploiting the staggered adoption of three key regulations that implemented distinct

engagement partner identification (EPI) formats for separate groups of Canadian

firms over a 10-year period, we investigate the association between eight audit qual-

ity proxies and three EPI formats: two indirect (auditor permit number in the report,

Form AP) and one direct (partner name in the report). This unique setting not only

enables us to examine the short-term association between three different EPI for-

mats and audit quality but also to investigate the long-term association for one EPI

format (auditor permit number). In the main analysis, out of 32 results of interest,

only three are significant and indicate a positive association. Hence, our results show

no widespread effect of EPI on audit quality, suggesting that the inconsistent results

reported in prior studies may not be driven by the different formats explored or the

short window investigated.

KEYWORDS

audit quality, auditor's report, engagement partner identification

1|INTRODUCTION

Over the past two decades, many jurisdictions have implemented

mechanisms enabling users of audited financial statements to identify

the engagement partner in charge of theaudit. A central argument put

forward by regulatory bodies is that engagement partner identification

(EPI) will increase accountability, which should increase overall audit

quality (PCAOB, 2015a). For their part, auditfirms have argued in their

comments to standard setters that EPI should have no effect on audit

quality as audits involve collaborative efforts and engagement partners

already operate within the context of audit-firm quality controls and

professionalinspections (e.g., Ernst & Young,2014;KPMG,2012).

Moreover, EPI could have unintended consequences such as

increased audit costs and reporting conservatism, a net degradation in

audit quality and, especially in the United States, a potential increase

in engagement partners' legal liability (e.g., Carcello & Santore, 2015;

Center for Audit Quality, 2015; King et al., 2012; KPMG, 2015; Lee &

Levine, 2020). Ultimately, representatives from stakeholder groups,

including regulators and academics, have voiced doubts over the (net)

benefit to society of EPI measures and concerns over the potential

detrimental effect on the audit market in the long run (e.g., Anderson

et al., 2014; Auditor Reporting Working Group, 2013; Bergner &

Lin, 2015; Hanson, 2013; Whitehouse, 2014). These reservations

have fed a contentious and lengthy debate over the need to require

EPI in general and the best way (i.e., EPI format) to achieve it. In turn,

this has led some jurisdictions, namely, the United States and Canada,

to adopt EPI rules much later than most and, in the case of the

United States, to retain an indirect form of EPI.

Direct EPI, where the engagement partner's name is disclosed in

the auditor's report, has been in effect for decades in countries such

as Australia, China, France or Germany. The European Union adopted

a mandatory signature rule in 2006 (Council Directive 2006/43/

EC, 2006), and the International Standards on Auditing (ISA) requires

it for auditors' report of listed entities since 2016 (ISA 700; see Inter-

national Auditing and Assurance Standards Board, IAASB, 2015). In

the United States, to address concerns raised over the potential

increase in partners' legal liability resulting from direct EPI,

1

the

PCAOB compromised (e.g., Goelzer, 2019; Tysiac, 2015) and imple-

mented an EPI rule in which names are disclosed separately from the

auditor's report, specifically in Form AP, which is filed on the PCAOB's

Received: 20 July 2022 Revised: 1 March 2023 Accepted: 16 April 2023

DOI: 10.1111/ijau.12315

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use, distribution and reproduction in any

medium, provided the original work is properly cited and is not used for commercial purposes.

© 2023 The Authors. International Journal of Auditing published by John Wiley & Sons Ltd.

Int J Audit. 2024;28:97–124. wileyonlinelibrary.com/journal/ijau 97

website weeks after the report is filed with the Securities Exchange

Commission (SEC). This indirect form of EPI has however been criti-

cized, as it may reduce the partner's own sense of accountability rela-

tive to direct EPI and thus limit whatever impact EPI may have on

audit quality (e.g., Cunningham et al., 2019).

As the debate over EPI evolved, key players involved in the

process, such as former PCAOB board member Jay D. Hanson,

noted that the evidence available at the time illustrating ‘(…)the

potential benefits of the disclosures [was] weak’(Hanson, 2013).

To date, still, the overall evidence on the effect of EPI is mixed. For

example, Burke et al. (2019), Carcello and Li (2013)andDaoetal.

(2019) document significant improvements on a variety of audit

quality proxies, while Blay et al. (2014), Cunningham et al. (2019)

and Doxey et al. (2021) document insignificant changes on the vast

majority of the audit quality indicators that they consider. Cun-

ningham et al. (2019, p. 156) conclude that ‘(…) at least two factors

may be driving [their] failure to find evidence of an increase in

audit quality following partner identification’for their US sample.

The first relates to the strict regulatory environment already exist-

ing in the United States at the time of adoption. For example, given

the extent of litigation threat and the quality of PCAOB oversight,

auditor accountability in the United States may already have been

close to a threshold above which additional measures set to

enhance accountability, such as EPI requirements, do not induce

further audit quality improvements. The second relates to the indi-

rect nature of EPI resulting from Form AP that ‘may not perva-

sively affect partners' sense of accountability’(Cunningham

et al., 2019, p. 156), again limiting the impact the adoption of EPI

requirements would have had in the United States. Finally, the

authors recognize that their study is limited to the initial adoption

of mandatory EPI and stress that future research is necessary to

investigate the long-term effects of such regulations. For example,

it is unclear whether the effect of EPI on audit quality materializes

over a longer period or, provided there exists a short-term impact,

whether the effect diminishes with time.

In this paper, we address two research questions motivated by

the points raised above, namely, (1) do mandatory direct and indirect

EPI formats improve audit quality? And (2) does mandatory EPI

improve audit quality in the long term?

To answer these questions, we exploit three key changes in regu-

lations that implemented three distinct EPI formats for Canadian firms

over a 10-year period, starting late 2008.

2

Importantly, given that pro-

fessional oversight is of provincial jurisdiction in Canada and that firms

cross-listed in the United States are also subjected to US reporting

requirements, the three changes did not apply to all Canadian firms

over this period. Indeed, the first change only applied to Quebec-

based auditors, the second change only applied to auditors of cross-

listed firms and the third change applied to auditors of all Canadian

firms that were not cross-listed. However, as described in section 3,

except for the specific EPI requirements examined in this paper, regis-

tered CPA auditors across Canada essentially operate in the same reg-

ulatory environment. This allows us to construct robust control

groups of similar firms subjected to the same institutional and

economic environments. In contrast with other EPI studies that use

firms from other countries as control groups (e.g., Blay et al., 2014;

Carcello & Li, 2013), or firms from the same country but over different

time periods as ‘baseline specifications’(e.g., Burke et al., 2019;

Cunningham et al., 2019; Dao et al., 2019), our design is less prone to

contamination by confounding events (e.g., the coming into force of

other requirements from the Companies Act (2006) in the

United Kingdom and economic shocks such as the 2008 financial cri-

sis) and omitted variables, which may be another reason for the con-

flicting evidence reported in the literature. The long time period

covered by our study also allows us to improve over previous EPI

studies not only by investigating the long-term association between

EPI and audit quality but also by incorporating subsequent restate-

ments of financial statements as a robust proxy for audit quality

(Aobdia, 2019; Rajgopal et al., 2021).

Moreover, our focus o n Canadian firms poten tially offers a

stronger setting to ide ntify an associatio n between EPI and audit

quality, if one exists, as compared to studies that have focused on

the impact of EPI in the US setting. As indicated above, in strong

regulatory environments, EPI may not increase partners' sense of

accountability beca use it is already high. C unningham et al. (2019)

suggest that this may explain their failure to find evidence of an

increase in audit quality following EPI requirements in the

United States, as ‘the U.S. has a more litigious env ironment and

greater pressure via P CAOB oversight compared to other countri es’

(Cunningham et al., 2019, p. 140). This argument may explain the

divergence between the results of Cunningham et al. (2019)inthe

United States and tho se of Carcello and Li ( 2013)inthe

United Kingdom. Hen ce, given the relatively less stri ngent regulatory

environment under wh ich Canadian firms op erate, compared to U S

firms, the adoption of EPI requirements in Canada may have led to

perceivable changes in audit practices.

We construct four separate difference-in-differences tests to

investigate the association between EPI and audit quality. The first

three tests vary according to the EPI format, while our last test inves-

tigates the long-term association with an indirect EPI format. Each

test is conducted using an array of eight measures of audit quality

commonly used in the literature.

With our first test, we examine the short-term effect (i.e., first

2 years) of indirect EPI resulting from the disclosure, beginning

December 2008, of the engagement partner's public accountancy per-

mit number in reports delivered by Quebec-based CPAs. Because

auditors registered in the other Canadian provinces were not sub-

jected to such EPI requirements, firms from the ‘Rest of Canada’

(ROC) act as our control group.

Our second test focuses on indirect EPI through Form AP. This

test builds on the fact that cross-listed firms in the United States must

disclose audit engagement partner names in Form AP. Specifically, our

test compares ROC cross-listed firms to a control group of ROC non-

cross-listed firms without EPI requirements for a period surrounding

the implementation of Form AP. This test complements recent EPI

studies in the United States (e.g., Burke et al., 2019; Cunningham

et al., 2019). Unlike these studies, our research design allows us to

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