Audit partners Flashcards
(36 cards)
Intro
Lennox Wu 2018
A review of the archival literature on audit partners.
Data:
Literature review Review of 54 archival studies published through May 2017 across major accounting journals
IV:
Retrieving data. Wait a few seconds and try to cut or copy again.
DV:
Various audit quality measures (discretionary accruals, going concern opinions, audit fees)
Findings:
“Boom in partner-level research from 1 study by 2006 to 54 by 2017
Mixed evidence on partner tenure effects on audit quality
Partner characteristics (gender, experience, industry expertise) show associations with audit outcomes
Significant methodological limitations including endogeneity issues and measurement errors
Partner compensation schemes and governance mechanisms affect audit quality”
Contribution:
“First comprehensive review of audit partner literature
Identifies key limitations in existing research
Provides framework for understanding partner incentives, characteristics, and governance
Suggests directions for future research including need for better data and research designs”
Notes:
Methodological advancement in audit partner research
The impact of audit partner style on audit quality: Evidence on heterogeneities from fixed effects estimations
Gul et al 2013
Do individual auditors affect audit quality? Evidence from archival data.
Data:
Signing auditors (can be partner or senior manager) 1998-2009. who signed multiple audits over multiple year..need for individual fixed effects
IV:
Indiv signing auditors + their demographic characteristics
DV:
AQ: GC, accruals, aggressive reporting, presence of small profit
Findings:
“Indiv auditor characteristics impact AQ.
Partners more conservative than non partners
Graduate degree or western education=more aggressive
Big N auditors=more conservative
Political affiliation=more aggressive
“
Contribution:
Auditor fixed effects impact audit quality & the effects are only partially explained by auditors demographic chracteristics (educ. Rank, Big N, experience). Show imp. of analyzing AQ at the indiv level & need for more partner level studies
Limitation:
external validity: Chinese audit firms centralized America= decentralized
Relevant Papers:
Betrand and Schoar 2003
Cameran, Campa, and Francis 2022
The relative importance of auditor characteristics versus client factors in explaining audit quality.
Data:
Archival - Nested fixed effects models, hierarchical linear models, LASSO regression UK listed firms 2009-2015; 5,411 firm-year observations, 665 unique partners
IV:
Audit firm, office, and partner fixed effects; partner demographic variables
DV:
Audit quality proxies (abnormal accruals, restatements, going concern reports)
Findings:
“Partner fixed effects are most important auditor characteristic explaining audit quality
Partner effects explain 24-29% of explained variance vs. 6-9% for offices and 1-4% for firms
Publicly available partner demographics explain little variation beyond fixed effects
Results consistent across Big 4 and non-Big 4 firms”
Contribution:
“Systematic comparison of firm, office, and partner effects on audit quality
Shows partner variation is most important but driven by unobservable characteristics
Challenges usefulness of demographic variables in partner research
Demonstrates need for deeper understanding of partner characteristics beyond public data”
Notes:
Advanced methodological approach to isolating partner effects
Evidence from the disclosure of audit partner identities
Carcello & Li 2013
Costs and benefits of requiring an engagement partner signature: Recent experience in the United Kingdom
Data:
UK listed firms 2008-2010
IV:
Pre & Post sign requirement
DV:
“Audit fees
AQ: accruals, meet or beat earnings threshold, issuance of modified reports, ERC”
Findings:
AQ & audit fees increased after partners are required to sgn audit reports
Contribution:
Partner disclosure lead to more conservtism in a less litiguous environment, UK. Increased accountability & transparency
Limitation:
“external validity UK: legal env. Less strict than US
small sample period
Didn’t do diff n diff model??”
Notes:
Matched UK firms to US & other european firms (where signature is required) and found more conservatism in years after disclosure
Relevant Papers:
Khurana & Raman 2004 & El Ghoul et al 2016 litigous environment impacts perceptions of AQ, this paper & cunningham et al. 2019 show it impacts actual AQ
Aobdia, Castellani, and Richardson 2023
Do investors care who led the audit in the U.S.? Evidence from announcements of accounting restatements.
Data:
Event study methodology examining market reactions to restatements US restatements 2017-2022; 965 tainted partner clients, control groups from Audit Analytics, CRSP
IV:
Tainted Partner (partner associated with client restatement)
DV:
Cumulative abnormal returns around restatement announcements
Findings:
“Partner’s non-restating clients experience -0.86 to -1.64 percentage point lower returns when partner associated with restatement
Effect stronger for material restatements (Big R) vs. revisions (little r)
Effect present for both Big 4 and non-Big 4 auditors
Market takes time to process information (price drift in longer windows)
Effect emerges 2-3 years after Form AP implementation”
Contribution:
“First evidence that US investors value audit partner disclosures on Form AP
Shows market uses partner track record as signal of audit quality
Demonstrates delayed market reaction suggesting disclosure processing costs
Validates PCAOB’s prediction that partner disclosure would be informative to investors”
Notes:
Effectiveness of audit partner disclosure regulationRetryClaude can make mistakes. Please double-check responses.
Intrinsic partner characteristics
Kallunki et al 2018
IQ and audit quality: Do smarter auditors deliver better audits
Data:
Swedish partners 2000-2009
IV:
“Partners IQ level
Controls:prop of public comp, industry spec, Career length, tenure, client size”
DV:
“AQ: GC reporting accuracy (Type 1 issue & shouldnt have, Type 2: opposite), aacruals
Audit fees”
Findings:
Partners IQ level positively correlates with AQ
Contribution:
Cognitive ability of auditors sign impact audit outcomes
Limitation:
“External validity: Sweden men
IQ: measured by required military test taken at the age of 18
Endogeniety concern: better clients may chose partners w. higher IQ”
Notes:
Could examine the results of the authorized competence exams that partners are required to take
Relevant Papers:
Nelson & Tan 2005: individuals cognitive limitations impact their judgments & decisions
Chou et al 2018
The importance of partner narcissism to audit quality.
Data:
Taiwanese lead parteners
IV:
Partners narcissism (intrinsic trait): size of signature
DV:
“Actual AQ: accruals, restatements
Perceived AQ: ERCs & borrowing cost (cost of capital)
“
Findings:
DeFond & Zhang 2014: Auditors supply of AQ based on competence & independence
Contribution:
Narcissistic partners (intrinsic trait) want to be recog as better than others, therfore their AQ is higher than other auditors (more independent not necessarily competent)
Limitation:
“External validity: Taiwan not highliy litigious”
Notes:
endogeneity concern that narcissistic partners get better clients, addressed by including manadatory rotations of partners to diff quality clients
Relevant Papers:
DeFonf & Zhang 2014 & DeAngelo 81
Formative events
He et a 2018
Long-term impact of economic conditions on auditors’ judgment
Data:
China partners 2006-2011
IV:
Economic conditions when partner began career
DV:
AQ: modified opinions, issuance audit adjustments (diff b/t client preaudited FS & audited FS)
Findings:
Partners degree of skepticism when making audit decisions correlates with the economic env. at the start of their careers. Start career during economic downturn more skeptical
Contribution:
Auditors’ experiences early in their careers have a imprint on their future actions, in that auditors that experience an economic downturn in the 1st year of their career, are more skeptical (questioning mindset)
Limitation:
External validity China not addressed
Relevant Papers:
Hurtt 2010 profess. Skept is an indiv trait that can change based on env.
Guo et al 2022
Once bitten, twice shy: The importance of audit partners’ first-hand experience with Arthur Andersen’s demise to subsequent auditing style.
Data:
Archival Partner Level US partners that worked at Andersen during Enron scandal
IV:
Partner work history Andersen vs non-andersen based on linked-in
DV:
“AQ: accruals
Audit fees:”
Findings:
Clients of partners who worked ar Andersen for less than 5 years during its collapse have lower accruald and pay larger fees (auditors more conservative). Concentrated at partners working at non big 4
Contribution:
Experience of a traumatic professional event early in their careers makes partners more conservative (stricter audit & don’t accept riskier clients) (imprinting effect). Hot stove: learn from prior experience
Limitation:
“Used linked-in to identify andersen partners posssiblt sample error. However this would bias against them finding results
# of AQ proxies”
Notes:
Matched clients of andersen partners w/ non andersen partners
Relevant Papers:
Davidson and Pirinsky 2019: less profitable insider trading once a trader experience a trading enforcement
Discipline from regulatory and market forces
He et al 2016
Reputational implications for partners after a major audit failure: Evidence from China
Data:
Chinese Enron data
IV:
Partner named in scandal, firm named in scandal
DV:
“# of partners that stayed in practice
Type of client audited following scandal
ERC following scandal
Audit fees following scandal”
Findings:
“Former partners of fruadulent audit firm had: 1. fewer clients 2. lower quality clients following the scandal 3. lower audit fees
The firms clients’ experienced lower ERC (perceived AQ) surrounding the scandal “
Contribution:
Show that auditors’ reputation impacts perceived AQ in a nonlitigious environment. Partners have a strong incentive to cross montor other partners
Limitation:
External validity
Notes:
“natural experiment
addressed external validity concerns & explained why china is a good setting
relevant bc US was considering disclosing partners identity
Matched firms
Dropped Hong Kong clients (bc HK is more litigious) & results still held”
Li, Qi, Zhang, and Tian 2017
The contagion effect of low-quality audits at the level of individual auditors.
Data:
Archival - Longitudinal and cross-sectional analysis with propensity score matching Chinese listed firms 1999-2011; CSMAR database; CICPA auditor profiles
IV:
Individual auditor audit failures (AUDITOR_FAIL_0/10); auditor personal characteristics (gender, education, experience)
DV:
Future audit failures; abnormal accruals (ABS_AB_ACC); audit quality measures
Findings:
“Auditors with prior failures show higher likelihood of future failures (longitudinal contagion lasting 4 years)
Current clients of ““failed”” auditors exhibit lower audit quality (lateral contagion)
No contagion effect across different auditors in same office
Contagion attenuated for female auditors, those with master’s degrees, and more experienced auditors
Office-level contagion disappears when controlling for individual-level effects”
Contribution:
“First to document audit quality contagion at individual auditor level rather than office level
Shows personal characteristics matter for interpreting audit failure signals
Supports mandatory disclosure of engagement partner identities
Demonstrates individual auditors drive quality problems rather than systematic office issues”
Notes:
Supports partner identification disclosure policies; suggests audit firms should monitor individual auditor performance patterns
Social Ties
Bruynseels & Cardinaels 2014
The audit committee: Management watchdog or personal friend of the CEO.
Data:
US listed comp 04-08 post SOX
IV:
Social tie b/t CEO and AC member (friendshio or professional)
DV:
“AQ Measures that need AC input (oversight measures): GC opinions issued, Earnings mmgt (accruals), audit fees (measures number of audit services), internal control weakness
“
Findings:
“Friendship ST= poorer oversight quality:
CEO purchase fewer audit service, engage in earning mgmt
Auditors likely to issue GC & internal control weaknesses
Professional ST don’t impavct monitoring quality”
Contribution:
AC may appear independent but may not be indpendent due to social ties. These ST can lead inadequate corp governance thru social bonds formed from social ties (social identity theory). More aggressive reporting
Limitation:
“Endogeneity concern: only firms w/ weak AC have social ties
doesn’t highlight the positive side of social ties: info sharing
no date restrictions on social ties, could be sample error…THIS WOULD GO AGAINST THEM FINDING RESULTS
need more cross sectional analysis: examine if audit committee chair has social tie with more sign executive”
Notes:
Multiple AQ proxies
He et al 2017
Do social ties between external auditors and audit committee members affect audit quality
Data:
Chinese data
IV:
Social tie b.t auditors & AC memebers. School ties & professional ties
DV:
Audit fees, propensty to issue modified opinion, report irregularities, firm’s valuation (Tobins Q)
Findings:
“ST= lower AQ: less likely to issue modified opinion, report irregularities, neg tobins Q
Results salient in firms with: ST b/t AC chair & partner & lower corp gov.
Audit fees are higher where ST exist (reciprocity)”
Contribution:
Social ties b/t AC & auditor lead to lower quality audits due to trusting bond formed thru ST.
Limitation:
“External validity
Endogeneity concern: certain types of firms have socia ties
“
Notes:
Validate external validity concerns bc china is an unique setting where social ties really matter
Professional and social networks
Bianchi 2018
Auditors’ joint engagements and audit quality: Evidence from Italian private companies.
Data:
Archival - Social network analysis using degree centrality measures; OLS and logistic regressions Italian private companies 2008-2011; 2,733 firm-year observations with Board of Statutory Auditors (BSA)
IV:
Auditor connectedness (CONNECTEDNESS) - number of collaborating auditors through joint engagements
DV:
Three audit quality measures: Modified audit opinions (MAO); Abnormal accruals (AAC); Tax-related restatements (TAX_REST)
Findings:
“Better-connected auditors more likely to issue modified opinions
Clients of well-connected auditors have lower abnormal accruals
Lower likelihood of tax-related restatements for well-connected auditors
Benefits stronger when BSA members from different vs. same accounting firms
Network effects incremental to other auditor expertise measures”
Contribution:
“First empirical study of auditor collaboration effects on knowledge transfer and audit quality
Introduces social network analysis to individual auditor research
Shows joint engagements facilitate knowledge sharing among auditors
Supports benefits of mandatory partner disclosure and joint audit arrangements”
Notes:
Supports joint audit arrangements and partner identification policies; demonstrates value of auditor collaboration
Pittman, Qi, Zhang, and Zhao 2021
The importance of social networks to individual auditors.
Data:
Archival - Manual data collection and social network analysis; instrumental variables; difference-in-differences Chinese listed firms 2000-2014; 18,847 audits by 3,934 auditors; CSMAR and CICPA data
IV:
Alumni networks - Auditor alumni (auditor connections) and Executive alumni (corporate executive connections)
DV:
Audit quality (abnormal accruals, modified opinions, restatements); Client acquisition; Career outcomes (promotions, firm upgrades, retention)
Findings:
“Larger social networks associated with higher audit quality across all measures
Better client acquisition and higher audit fees for well-connected auditors
Enhanced career prospects: more promotions, upgrades to top firms, lower attrition
Auditor alumni more important for audit quality; executive alumni more crucial for business development
Effects persist after controlling for auditor ability and using exogenous network shocks”
Contribution:
“First comprehensive study of individual auditor social networks across multiple career dimensions
Shows social capital enhances both audit quality and career success
Distinguishes between different types of network connections and their specific benefits
Provides evidence for network-based knowledge transfer in auditing profession”
Notes:
Demonstrates importance of social connections in audit profession; supports policies enabling auditor networking and knowledge sharing
Audit partner tenure
