What Happens to Partners Who Issue Adverse Internal Control Opinions?
52 Pages Posted: 14 Mar 2023 Last revised: 13 Aug 2023
Date Written: August 10, 2023
We investigate how audit firms balance the tension between professional responsibility and client service by examining changes in partner assignments following adverse internal control opinions (ICOs). We find that partners are significantly more likely to be reassigned when they issued an adverse ICO to any of their clients in the previous year. Further, partners issuing adverse ICOs experience unfavorable changes in their client portfolios in the form of lower fees and less prestigious client assignments. We find that partner consequences are more negative when adverse ICOs are issued to more important clients and are not negative at all for partners issuing continuing adverse opinions to clients they have “inherited” from an original adverse ICO partner. The negative portfolio effects we observe for adverse ICO partners persist for at least three years, and our findings are robust to restrictions involving mandatory partner rotation, restatements, and adverse ICOs that lead to client loss. Overall, our results are consistent with adverse ICO partners experiencing negative consequences as audit firms respond to client service incentives in the area of internal controls over financial reporting.
Keywords: audit partner, internal control, material weakness, adverse internal control opinion, ICFR
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