Investors and regulators will benefit from a new Public Company Accounting Oversight Board regulation requiring firms to disclose the lead engagement partner on an audit, according to a new academic study.
The new rule takes effect at the end of January. The study found a significant decline in audit quality when there were interlocking relationships involving the audit committee and audit engagement partner but not when there were other kinds of interlocks, such as those between clients who share a common audit committee member and audit firm but not a common engagement partner.
The research, conducted by Gary S. Monroe of University of New South Wales Australia, his UNSW Australia colleague Sarowar Hossain, Mark Wilson of the Australian National University and Christine Jubb of Swinburne University of Technology, describes the benefits of engagement-partner disclosure, which has been required in Australia since the 1970s. The conclusions come from an analysis of financial reporting by hundreds of Australian companies over a nine-year period.
“Our results strongly support requiring identification of the engagement partner,” Monroe said in a statement. “Coupled with disclosure of audit committee members and audit fees, it uniquely enables investors and regulators to identify interlocking networks likely to impair audit quality—as, for example, in willingness to issue a going-concern opinion.”
The study appears in the November/January issue of Auditing: A Journal of Practice and Theory, published by the American Accounting Association.