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

51 Pages Posted: 13 Jun 2022

See all articles by Bethany Brumley

Bethany Brumley

University of Illinois at Urbana-Champaign

Keith Czerney

University of Missouri-Columbia

Jaime J. Schmidt

University of Texas at Austin

Anne Thompson

University of Illinois at Urbana-Champaign

Date Written: May 28, 2022

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

Suggested Citation

Brumley, Bethany and Czerney, Keith and Schmidt, Jaime J. and Thompson, Anne, Can a Principal Auditor Reduce Accountability for an Audit Engagement by Dividing Responsibility With Another Auditor? (May 28, 2022). Available at SSRN: https://ssrn.com/abstract=4127503 or http://dx.doi.org/10.2139/ssrn.4127503

Bethany Brumley

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Keith Czerney

University of Missouri-Columbia ( email )

College of Business
Columbia, MO 65211
United States

Jaime J. Schmidt (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

Anne Thompson

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

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