The Assignment of Engagement Quality Reviewers and Disclosure Stickiness of Key Audit Matters: Evidence from China

Abstract

Exploiting the requirement for listed firms in China to disclose the information of engagement quality reviewers (EQRs) since 2020, we examine the determinants and consequences associated with EQR assignments. First, we find that audit firms are more likely to assign EQRs with more public auditing experience to first-signing auditors with poor performance, but not necessarily to high-risk clients. Second, we observe that when EQRs possess the highest levels of public auditing experience, clients in financial distress exhibit reduced disclosure stickiness of key audit matters (KAMs) compared to those not in financial distress. This effect is more pronounced when EQRs are not the busiest reviewers and have auditing experience within the same industry as the reviewing engagement. Further tests reveal that this reduced stickiness is specific to the audit solution component of KAMs, rather than the descriptive component. Notably, we do not find evidence that EQRs’ public auditing experience improves audit quality for high-risk clients or for signing auditors with poor performance. In summary, our results indicate that assigning EQRs with public auditing experience is related to the disclosure style of KAMs but has no significant impact on audit quality, suggesting a limited role of EQRs in the audit process.

Keywords: Engagement quality reviewers, Assignments, Key Audit Matters, Disclosure stickiness