Nevertheless, audit quality did improve around the time that the controversial rule (3211) was introduced but according to research this was down to other reasons, including a continuation of a similar improvement registered the previous year.
Rule 3211 came into effect on 31 January 2017 after a tortuous 12 years’ worth of iterations, arguments and compromises. Unlike in the UK where the lead engagement partner signs the audit report in companies’ annual accounts, the US version ended up requiring their identity to be disclosed in Form AP, which has to be filed 35 days after the annual report and is available only on the Public Company Accounting Oversight Board’s (PCAOB’s) website.
One of the main arguments for introducing the rule was that disclosure of the auditor’s name would not only increase transparency in the audit process but also improve the accountability of the lead engagement partner. That combination would result in an enhanced audit quality.
Or would it? Four academics – Lauren Cunningham (University of Tennessee), Chan Li (University of Kansas), Sarah Stein (Virginia Tech) and Nicole Wright (James Madison University) – analysed whether introduction of the rule had had any influence on audit quality.
They put together two control groups of publicly traded audit clients. Group one comprised S&P 1500 companies that disclosed audit engagement partners at their annual meetings and on their website in the year before the rule was introduced, while group two included all companies that issued their annual reports in the months prior to 31 January 2017 and so did not have to identify the lead engagement partners overseeing their audits.
The academics said that if the new rule was going to greatly improve audit quality, the improvement would be significantly better for companies that hadn’t previously disclosed engagement partners (group two) than for group one which had done so.
Furthermore, the enhancement should be greater for group-one companies disclosing audit partner identities in Form AP, than for group two, who released their financial reports before the January implementation date and didn’t have to fill in a Form AP.
The results took the academics by surprise: neither proposition turned out to be true. They were unable to detect a significant change in audit quality attributable to rule 3211.
There are two possible reasons why this turned out to be the case, they suggested. “First, accounting firms argued that partner accountability was already sufficiently high prior to mandatory disclosure, such that partner identification would not induce additional improvements to audit quality. Second, the final adoption of Rule 3211 required audit partner disclosure in Form AP, which…may not pervasively affect partners’ sense of accountability as the PCAOB originally intended.”
They added that, as their research focused on the rule’s introduction, future research would be necessary to ascertain the long term effects of the increased transparency on investors, audit committees and the audit partners themselves.
The research was published in the September/October issue of the American Accounting Association’s magazine, The Accounting Review.