Investor reaction to the audit engagement partner disclosure rule

Abstract

Purpose This paper aims to examine whether investors perceive the adoption of Public Company Accounting Oversight Board (PCAOB) Rule 3211, which mandates disclosure of the identity of audit engagement partners for the US-listed companies, as providing net benefits to the companies. Design/methodology/approach This study identifies 33 events leading up to the adoption of the PCAOB rule and examines the market reaction around these events. Findings The author finds positive abnormal market-wide returns in response to events that increase the likelihood of adopting the mandate. These positive returns are relatively stronger among companies with higher audit risk and companies with high-quality auditors. Practical implications The results of this study indicate that market participants expect that the overall benefits from the audit engagement partner disclosure rule outweigh the associated costs for average firms and in particular for firms with high audit risk and high-quality auditors. Originality/value Prior studies document mixed evidence on the net effects of PCAOB Rule 3211 on audit quality and audit fees, potentially because of the short post-rule adoption period and the weak effect of the rule on audit quality and audit fees during the transition period. The author complements these studies by providing the first evidence on the way that the stock market reacts to events that change the likelihood of the adoption of the audit engagement partner disclosure mandate.

Partner cross-contagion in audit offices and client reporting quality

“…The findings regarding cross-contagion are important to audit firms and stakeholders that are concerned with audit quality (Park, 2021). The results indicate cross-contagion is associated with lower quality in Big 4 offices despite their generally being considered as providing high-quality audits (DeFond and Zhang, 2014).…”

“…Research from jurisdictions where audit partners are identifiable has progressively revealed useful information about the important role of partners in determining audit outcomes (Lennox and Wu, 2018; Lee et al , 2018; Park, 2021). Variation in audit quality at the partner level is now documented in a range of studies (Gul et al , 2013; Cameran et al , 2020; Porumb et al , 2021).…”