Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions

TLDR

The study investigates how audit partners’ reporting styles persist over time and affect client firms’ economic outcomes. Audit partners’ aggressive or conservative reporting styles persist across engagements, are reflected in abnormal accruals, and lead to market penalties such as higher borrowing costs, poorer credit ratings, worse insolvency forecasts for private firms, and lower Tobin’s Q for public firms.

Abstract

Abstract This study examines the persistence and economic consequences of variations in reporting style across audit partners in individual engagements. Our results show that both aggressive and conservative audit reporting, measured by the pattern of prior Type 2 and Type 1 audit reporting error rates in auditor‐specific clienteles, persist over time and extend to other clients of the same partner. Analyses of abnormal accruals and persistence of client firms’ accrual estimates corroborate this finding, and hold both for private and publicly listed companies. Further, our results also show that the market penalizes client firms susceptible to aggressive audit partner reporting decisions. In particular, we find that our proxies for aggressive audit reporting are related to higher interest rates, worse credit ratings and less favorable forecasts of insolvency for private client companies, and a lower Tobin's Q for publicly listed client companies. Collectively, these results imply that audit partner aggressive or conservative reporting is a systematic audit partner attribute and not randomly distributed across engagements.