Study questions value of audit partner disclosure

A rule from the Public Company Accounting Oversight Board requiring auditing firms to disclose the names of the engagement partners who participated in an audit may not be having much of an impact on audit quality, according to a new academic study.

The PCAOB originally proposed a requirement in 2009 for companies to identify their lead engagement partners in their annual reports, but the proposal met with widespread opposition in the accounting and audit profession. After several changes and compromises, the PCAOB scaled back Rule 3211 to require firms to disclose the names of engagement partners and other accounting firms that participated in public company audits on a separate Form AP for audit participants, which is supposed to be filed within 35 days after the annual report and is available only on the PCAOB Web site.

However, the new study found that the requirement, which took effect on Jan. 31, 2017, is not necessarily working in terms improving audit quality and transparency.

The study, by Lauren Cunningham of the University of Tennessee, Chan Li of the University of Kansas, Sarah Stein of Virginia Tech, and Nicole Wright of James Madison University, appears in the current issue of The Accounting Review, a peer-reviewed journal of the American Accounting Association.

The researchers found that whatever improvement may have been occurring had little to do with Rule 3211. They examined two control groups of publicly traded audit clients. One group (the “early discloser sample”) included S&P 1500 companies that disclosed audit engagement partners at their annual meetings and on their websites in the year prior to Rule 3211 going into effect. A second group (the “pseudo adopter sample”) included companies that issued their annual reports in the months prior to Jan. 31, 2017, and didn’t have to identify the lead engagement partners overseeing their audits.

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If the new rule prompted an increase in audit quality, the researchers surmised that change should have been significantly greater for companies that didn’t previously disclose engagement partners than for the early disclosers (who were doing so already), and should have been significantly greater for companies disclosing audit partner identities in Form AP than for the pseudo adopters, which released their financial reports before Jan. 31 and did not have to file Form AP.

But neither outcome turned out to be the case for key measures of audit quality, which calls into question just how effective the new mandate has proved to be. “We are unable to detect a significant change in audit quality attributable to Rule 3211,” said the researchers.

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