Consequences of Low-Quality Audits for Engagement Partners: The Importance of Audit Firm Quality Control Systems

46 Pages Posted: 9 Jun 2017 Last revised: 28 Jul 2019

Date Written: July 24, 2019

Abstract

We investigate the consequences of low-quality audits for engagement partners in the US and the role audit firm quality control systems play in this process. We employ a sample period during which the identity of the engagement partner on specific audits is not publicly known to isolate the effect of quality control systems on partner management. We find that restatements result in partner changes for both restating and non-restating clients. Because the identity of the partner on an audit is not publicly known, non-restating clients may not be fully aware of the restatements associated with their engagement partners. We find that audit firms with ineffective partner quality control systems take advantage of this opaque information environment and do not replace low quality partners, especially if the partners can bring in large audit fees. Even if these audit firms replace the partner, they do not supply a new partner with higher quality. Our results highlight the importance of an effective quality control system in disciplining partners. When audit firm quality control systems fail, enhanced transparency through disclosing the identity of the engagement partner may be necessary in disciplining the auditing labor market.

Suggested Citation

Aobdia, Daniel and Petacchi, Reining, Consequences of Low-Quality Audits for Engagement Partners: The Importance of Audit Firm Quality Control Systems (July 24, 2019). Available at SSRN: https://ssrn.com/abstract=2983900 or http://dx.doi.org/10.2139/ssrn.2983900

Daniel Aobdia (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

Reining Petacchi

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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