Investors indeed react when they know the name of an engagement partner on an audit, although it may not be the reaction regulators expected when they required audit firms to give names.
The Public Company Accounting Oversight Board began collecting and publishing the names of engagement partners on all public company audit engagements under a controversial standard that took effect in 2017. Firms are required to file Form AP with the PCAOB after an audit is complete to identify the engagement partner on each audit as well as individuals or firms outside the principal firm that contributed to the audit conclusion.
While members of the PCAOB initially gunned for engagement partner signatures on the audit report, the Form AP filing became the requirement to quell fury that a signature or even a name in the audit report would have the effect of increasing liability. Even among the PCAOB’s five members, debate swung heavily on the lack of substantive evidence that requiring a signature or even a name for the engagement partner would achieve any specific regulatory objective.
Now emerging academic research suggests investors are less likely to invest in a company when they know the identity of an engagement partner who has been linked to another engagement that led to restatement. What’s more, the reaction is strong, the research suggests—maybe stronger than regulators imagined when they finalized the requirement.
The study, published this spring in the academic journal of the American Accounting Association, seeks to identify how investors respond when they know the name of an engagement partner, not just the audit firm, on a given engagement. It finds not only a contagion effect but a heightened one when the auditor knows the name of the partner and that partner has been linked to a restatement. “We provide evidence that investors attribute more blame to partners for a negative outcome due to audit partner disclosure,” the study says.
The research found 77 percent of test subjects selected a given investment even when they knew the audit firm was linked to a busted audit, but the percentage dropped to 63 percent for subjects who knew the name of the partner as well as the firm linked to a busted audit. “Our results suggest that audit partner identity disclosure results in partner-based contagion above and beyond any effect due to shared industry and shared firm,” the report says.
Co-author Tamara Lambert, a professor at Lehigh University, says the results should give regulators some pause. She raises questions about whether the new filing requirement could work against auditor independence.
“With the whole new layer of pressure on audit partners that our research reveals,” Lambert says, “it is easy to imagine how they would see their personal reputations tied to those of their clients—how, for example, it would reduce their incentive to push management to restate finances in the face of its reluctance to do so.”