What's in a Name? Reputation and Monitoring in the Audit Market

36 Pages Posted: 7 Sep 2016 Last revised: 28 Feb 2018

See all articles by Somdutta Basu

Somdutta Basu

Econ One Research, Inc.

Suraj Shekhar

University of Cape Town

Date Written: February 26, 2018

Abstract

Since February 2017, the name of the engagement partner has to be disclosed for all audit reports issued in the USA. We show that this quest for transparency has its pitfalls. Though this rule increases the level of information for investors, it can have negative consequences if we ignore how the rule changes the incentives of the relevant players (auditors). There is a tension between monitoring and reputation incentives when moving from collective reputation environments to individual reputation environments. We analyze the new rule and study the resulting change in auditor incentives to show that while the consequent higher reputation incentives can improve audit quality, partners have a lower incentive to monitor other partners when names are disclosed. This may lead to a fall in audit quality when the rule is implemented. We present several solutions to this problem.

Keywords: Audit, Disclosure, Collective Reputation, Engagement partner, Reputation, Monitoring

JEL Classification: L14, L51, M42

Suggested Citation

Basu, Somdutta and Shekhar, Suraj, What's in a Name? Reputation and Monitoring in the Audit Market (February 26, 2018). Available at SSRN: https://ssrn.com/abstract=2835228 or http://dx.doi.org/10.2139/ssrn.2835228

Somdutta Basu

Econ One Research, Inc. ( email )

United States

Suraj Shekhar (Contact Author)

University of Cape Town ( email )

Private Bag X3
Rondebosch, 7701
South Africa

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