Opening up the ‘Black Box’ of Audit Firms: The Effects of Audit Partner Ownership on Audit Adjustments

51 Pages Posted: 20 Oct 2020

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Chunfei Wang

Central University of Finance and Economics (CUFE)

Xi Wu

Central University of Finance and Economics (CUFE)

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2020

Abstract

Audit firms need to provide high quality audits but they also need to please their clients. We argue that these conflicting incentives become manifest when comparing the incentive effects of equity ownership on engagement quality (EQ) reviewers and audit engagement partners. We predict that EQ reviewers monitor audit quality more closely when they hold greater ownership. In contrast, we expect that equity ownership has conflicting effects on the incentives of engagement partners because they need to please their clients as well as provide high quality audits. Consistent with these predictions, we find that the associations between audit adjustments and partner equity ownership are: 1) significantly positive for EQ reviewers, 2) significantly negative or insignificant for audit engagement partners, and 3) significantly more positive for EQ reviewers than engagement partners. Our findings suggest that larger ownership stakes motivate EQ reviewers to monitor audit quality more closely, whereas larger ownership stakes do not motivate engagement partners to deliver higher quality audits.

Keywords: Audit partners; Equity ownership; Engagement quality reviews; Audit adjustments

JEL Classification: M40, M41, M42, M52

Suggested Citation

Lennox, Clive and Wang, Chunfei and Wu, Xi, Opening up the ‘Black Box’ of Audit Firms: The Effects of Audit Partner Ownership on Audit Adjustments (September 3, 2020). Available at SSRN: https://ssrn.com/abstract=3685579 or http://dx.doi.org/10.2139/ssrn.3685579

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Chunfei Wang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China
+8613426475019 (Phone)

Xi Wu

Central University of Finance and Economics (CUFE) ( email )

Beijing, Beijing
China

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