Can a Principal Auditor Reduce Accountability for an Audit Engagement by Dividing Responsibility With Another Auditor?

Abstract

We investigate whether the principal auditor’s decision to divide responsibility with other auditors reduces the principal auditor’s accountability for an audit engagement. Our findings would inform the PCAOB about a potential unintended consequence of their recent proposal that retains division of responsibility. We find that principal auditors are less likely to be named as defendants in restatement-related class action litigation when they divide responsibility for an audit engagement with other auditors. In addition, we find that shareholders are less likely to initiate restatement-related litigation against the company when the auditor divides responsibility during the misstated period. Finally, we find that auditors who divide responsibility are more likely to be dismissed by the client, on average, but are not more likely to be dismissed following restatement announcements. Our findings indicate that adding division of responsibility language to the audit opinion reduces auditor accountability for low-quality auditing but is not perceived favorably by clients.

Keywords: audit reports; division of responsibility; auditor accountability

JEL Classification: M41; M42