Does Availability of Audit Partners Affect Audit Quality? Evidence From China

Abstract

In this study, we examine whether Chinese Certified Public Accountant (CPA) firms with more partners available to perform audit engagements deliver higher quality services. Based on a sample of 2,990 company-year observations over the period of 2002 to 2015, we find that CPA firms with smaller staff–partner ratios are associated with a lower likelihood of restatements of their clients’ financial statements. Interestingly, we find that this association is less evident when engagement partners have excessive workloads, suggesting the need to balance workloads across partners within a firm. Overall, our results highlight the importance of considering partner availability and its impacts on audit quality, which echo regulators’ growing concern about the inadequate mix of audit experience, expertise, and supervision within CPA firms. Our study is timely and the results are informative to the recent policy debate. From a public policy perspective, our results suggest that CPA firms should be required to disclose information about the deployment of audit partners to help financial statement users make inferences about the quality of their work.

Auditor Assignments and Audit Quality

“…The mean value of ROA is 0.036, indicating that the sample firms’ average ROA is about 4%, consistent with prior research (e.g., Lo et al. 2022).…”

“…Third, the impact of downward mismatch on audit quality is less pronounced in audit firms with more partners available, consistent with the notion that the audit firm's partner availability enhances the coaching and monitoring of the staff (Lo et al. 2022), which mitigates the negative effect of downward mismatch on audit quality. We also find that the negative effect of downward mismatch on audit quality is more pronounced when clients’ business is more complex.…”

The Relative Importance of Auditor Characteristics Versus Client Factors in Explaining Audit Quality

“…The third research question asks whether there are inter-partner differences, after controlling for both interfirm and interoffice differences. Recent studies find evidence that partner characteristics may have an effect on audit outcomes (Cahan & Sun, 2015; Kallunki et al, 2019; Knechel et al, 2015; Lo et al, 2019). Audit partner research has emerged in recent years due in part to the growing availability of partner data in many countries (Lennox & Wu, 2018).…”

“…However, this body of research has not systematically investigated the incremental effects of firms, offices, and partners in the kind of nested analysis as in our study. Instead, prior studies typically focus on just one factor at a time such as certain accounting firm differences (Lennox & Pittman, 2011), or certain engagement office differences (Francis & Yu, 2009), or the effects of certain partner characteristics (Kallunki et al, 2019; Lo et al, 2019), while ignoring other auditor characteristics that may also be important.…”

El origen de ingresos del auditor y calidad de la auditoría: el caso español

“…De entre todos, el trabajo de Lo et al (2019) es el que más se puede aproximar a nuestro estudio, pues examina la relación entre la ratio de auditores de la firma respecto del total de socios firmantes de la misma, y la calidad de la auditoría la miden a través de la presencia de reformulaciones de las Cuentas Anuales. Estos autores concluyen que la calidad de la auditoría no solo depende del tamaño, de la reputación y de la especialización del auditor, sino también de la suficiencia del capital humano y del apalancamiento del personal.…”