Impact of the disclosure of audit engagement partners on audit quality: Evidence from the USA

• Date: 01 March 2019
• Published date: 01 March 2019
• Author: Long Liu,Hongkang Xu,Mai Dao
• DOI: http://doi.org/10.1111/ijau.12149

ORIGINAL ARTICLE

Impact of the disclosure of audit engagement partners on audit

quality: Evidence from the USA

Mai Dao

1

|Hongkang Xu

2

|Long Liu

3

1

The Department of Accounting, The

University of Toledo, Toledo, Ohio, USA

2

Accounting and Finance Department,

University of Massachusetts, Dartmouth,

Massachusetts, USA

3

Department of Economics, The University of

Texas at San Antonio, San Antonio, Texas,

USA

Correspondence

Mai Dao, The Department of Accounting, The

University of Toledo, Toledo, OH, USA.

Email: mai.dao@utoledo.edu

The debate concerning the recent regulation in the USA mandating accounting firms

to disclose engagement partners' identity is ongoing. We examine the impact of the

Public Company Accounting Oversight Board's (PCAOB's) requirement of disclosing

engagement partners' names on Form AP on the quality of audit engagements. Using

two measures of audit quality (abnormal accruals and the probability of detecting

material weaknesses in internal control), we find that disclosing engagement partners'

names is associated with a lower level of abnormal accruals and a higher probability of

accounting firms detecting material weaknesses in internal control. Our study extends

the contemporary research on the disclosure of engagement partners' identification

by providing additional evidence to the literature on this issue in the U.S. setting.

Our study also provides evidence supporting the PCAOB's perception that this disclo-

sure leads to higher audit quality.

KEYWORDS

audit quality, engagement partners, partner identification

1|INTRODUCTION

Stemming from the final report of the U.S. Treasury Advisory Commit-

tee on the Auditing Profession (ACAP) in 2008 recommending the

Public Company Accounting Oversight Board (PCAOB) to mandate

engagement partners' signatures on auditors' reports (ACAP 2008),

the PCAOB issued Concept Release No. 2009‐005 “Requiring the

engagement partner to sign the auAudit report”to propose requiring

the signature of engagement partners during audits (PCAOB, 2009).

After soliciting and analyzing public comments, the PCAOB revised

its proposal in 2011 to require the disclosure of an engagement part-

ner's name without including a partner's signature on the audit report.

The PCAOB adopted the final rule that requires accounting firms to

disclose engagement partners' names in a new PCAOB Form AP on

December 15, 2015 (PCAOB, 2015). According to this new rule,

engagement partners do not have to sign auditors' reports, but their

names must be disclosed on PCAOB Form APs for all public company

audits on or after January 31, 2017.

We aim to examine whether audit quality is associated with the

requirement of disclosing engagement partners' names in the USA.

This is an important question, because even though the PCAOB

believes that disclosing engagement partners' names will enhance

auditors' accountability, will improve transparency in the audit pro-

cess, and, eventually, will lead to higher audit quality, the prior theo-

retical and empirical evidence provides mixed findings on the impact

of disclosing engagement partner identification on audit quality in

other countries (Blay, Notbohm, Schelleman, & Valencia, 2014;

Carcello & Li, 2013; Carcello & Santore, 2015; Cianci, Houston,

Montague, & Vogel, 2017). For example, Carcello and Li (2013) docu-

mented that introducing the audit partner signature requirement in

the UK resulted in improved audit quality (i.e., a significant decrease

in abnormal accruals, a decline in the propensity to meet an earnings

threshold, a higher incidence of qualified audit reports, and an increase

in earnings informativeness). In contrast, Blay et al. (2014) found the

mandate does not affect audit quality in the Netherlands. Recently,

Cianci et al. (2017) found that audit partners provide more aggressive

write‐down judgments after the disclosure of either an engagement

partner or a partner signature mandate.

It is worthwhile investigating the relation between the introduc-

tion of engagement partner disclosure requirements and audit quality

in the USA for the following reasons. First, the litigation risks in the

USA are higher than in other countries (PCAOB, 2011; Cianci et al.,

2017). Compared with accounting firms in lower litigation risk

countries (including the UK), U.S. accounting firms must make more

Received: 28 August 2018 Revised: 18 November 2018 Accepted: 19 November 2018

DOI: 10.1111/ijau.12149

112 © 2019 John Wiley & Sons Ltd Int J Audit. 2019;23:112–124.wileyonlinelibrary.com/journal/ijau