The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements

53 Pages Posted: 24 May 2015

See all articles by Yanyan Wang

Yanyan Wang

Xiamen University

Lisheng Yu

Xiamen University

Yuping Zhao

University of Houston

Date Written: May 22, 2015

Abstract

We study whether audit-partner quality influences the probability of annual report misstatements (measured by restatements) and whether various levels of quality control attenuate such influences. We measure audit-partner quality with audit failure rate (i.e., the total number of audit failures associated with an audit partner divided by the total number of audit reports signed by the same partner). We report the following key findings. First, an audit partner’s past audit failure rate is positively associated with the probability that the current year annual report that he or she audits is subsequently restated. This positive association is more pronounced for engagement partners (i.e., partners who actually conduct the audits) than for review partners (i.e., partners who review the audits). Incorporating audit partner audit failure rates substantially increases the predictive power for future financial report restatements. Second, neither engagement-team-level nor audit-firm-level quality controls consistently attenuate engagement audit partners’ influence on the probability of future restatements. Third, engagement audit partners’ influence on the probability of future restatements becomes stronger for audits of more important clients. Taken together, the evidence suggests that, despite various levels of quality control, audit-partner quality significantly influences engagement quality and that such influences are exacerbated by audit partners’ own economic incentives.

Suggested Citation

Wang, Yanyan and Yu, Lisheng and Zhao, Yuping, The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements (May 22, 2015). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2609528

Yanyan Wang

Xiamen University ( email )

Xiamen, Fujian 361005
China

Lisheng Yu

Xiamen University ( email )

Xiamen, Fujian 361005
China

Yuping Zhao (Contact Author)

University of Houston ( email )

334 Melcher Hall
Houston, TX 77204
United States
713-743-2166 (Phone)
713-743-4828 (Fax)

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