The Impact of Audit Engagement Partner Disclosure on Audit Outcomes in the United States

ABSTRACTTHE IMPACT OF AUDIT ENGAGEMENT PARTNER DISCLOSURE ON AUDIT OUTCOMES IN THE UNITED STATESbyJames Alan BellThis study is motivated by the Public Company Accounting Oversight Board’s (PCAOB) mandate requiring the public disclosure of the audit engagement partner’s identity. Prior to the ruling, the audit engagement partner (AEP) was known only to the company’s management, audit committee, audit firm, and regulators. The PCAOB maintains that disclosure of the AEP will increase the partner’s sense of accountability; and increase transparency in the audit process; leading to improved audit quality; and improved financial reporting quality; thereby improving the credibility of financial reporting to investors (PCAOB, 2015).Disclosure of the AEP has inspired much debate among investors, auditors, academicians, and regulators. A key concern is whether the PCAOB mandated disclosure of the AEP’s identity without sufficient supporting research. Therefore, whether the disclosure of the audit engagement partner’s identity will impact audit outcomes in the United States is an empirical question.Specifically, I examine the effect of AEP disclosure on audit quality, audit fees, audit report lag and shareholder auditor ratification voting. Using four proxies to measure audit quality, I find a significant decline in management’s use of discretionary accruals and in the propensity of managements’ use of discretionary accruals to meet or beat analysts’ earnings forecast in the post-AEP disclosure period. However, my results do not detect a significant change in audit quality measured by the propensity of management to engage in small earnings increases; or the association between reported earnings and stock returns. I find that audit fees are significantly higher post-AEP disclosure, while audit report lag shortened post-AEP disclosure compared to pre-AEP disclosure. These findings suggest audit partners increased audit fees due to liability concerns associated with disclosure, such as insurance costs and reputational risk, and not due to increased time or effort. My results also show that the percentage of shareholders abstaining or voting against the ratification of management’s selection of an external auditor decreased post-AEP disclosure. Overall, my results provide some evidence as to the benefits of AEP disclosure, however, the benefits are associated with increased costs to investors, creditors, audit partners and the accounting profession.