The Effects of Audit Partner Pre-Client and Client-Specific Experience on Audit Quality and on Perceptions of Audit Quality

Abstract:     
Building on the model in O’Keefe et al. (1994) where audit quality is a function of general knowledge, client-specific knowledge, and other factors, we examine the effects of pre-client experience (our proxy for general knowledge) and client-specific experience (our proxy for client-specific knowledge) on audit quality and on perceptions of audit quality for both public and private companies. We use audit data from Taiwan, where the names of signing audit partners are disclosed and both public and large private companies are required to publish audited financial statements, and we use discretionary accruals to proxy for audit quality, and the bank loan interest rate spread to proxy for creditor perceptions of audit quality. We find that for public companies, an audit partner’s pre-client experience enhances audit quality, but the effect of pre-client experience on audit quality is smaller than that of client-specific experience, suggesting a transition cost in terms of audit quality associated with mandatory auditor rotation. For private companies, we find some evidence that pre-client experience improves audit quality and that client-specific experience improves audit quality, thus extending our understanding of the benefits of audit partner and audit firm tenure from public to private companies. Finally, we find that both pre-client experience and client-specific experience improve creditor perceptions of audit quality for public as well as private companies. Our findings are important because they reveal the effects of more finely parsed measures of auditor experience (tenure) on audit quality and on creditor perceptions of audit quality for both public and private companies. Our study is timely in light of the Public Company Accounting Oversight Board’s ongoing deliberations about mandatory audit firm rotation. In addition, our findings provides evidence consistent with the beliefs underlying the Public Company Accounting Oversight Board’s proposal to disclose the name of the engagement partner in the audit report – that the disclosure of the engagement audit partner could provide useful information to investors.

Number of Pages in PDF File: 47

Keywords: Auditor Experience, Pre-Client Experience, Audit Quality, Public Companies, Private Companies

JEL Classification: M49, M41, M43, M47, G12

working papers series