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

Abstract

We study incentives under different information regimes by analyzing a rule change in the audit industry in the USA. 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 despite the increase in the level of information for investors. While the higher reputation building incentives can improve audit quality, an unintended consequence of the rule is that audit partners have a lower incentive to monitor other partners when names are disclosed. We find conditions under which the latter effect dominates the former.

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

JEL Classification: L14, L51, M42