Does the Disclosure of an Audit Engagement Partner’s Name Improve the Audit Quality? A Difference-in-Difference Analysis

Abstract

On 15 December 2015, the Public Company Accounting Oversight Board (PCAOB) passed Rule 3211, requiring audit firms registered with PCAOB in the U.S. to disclose the audit engagement partner’s name in the Form AP, effective 31 January 2017. The regulation aims to improve the transparency and quality of audits, thereby increasing investors’ confidence in financial statements. Using the audit firms registered with the PCAOB and their clients as the treated sample, we employed a difference-in-difference analysis to investigate whether and the extent to which implementing Rule 3211 impacts audit quality and audit costs. We compared the audit quality (proxied by the abnormal discretionary accruals quality, the probability of restating the financial statements, and the ratio of the audit fees to the total fees) and audit costs (proxied by the total audit fees) from one year (up to three years) pre- to one year (up to three years) post-Rule 3211, to a control sample (comprised of U.K. audit firms, which were not subject to such regulation during the sample period). The empirical results generally indicate that there was an increase in the audit quality and in the audit costs from the pre- to the post-Rule 3211 period and also suggest that auditor independence increased in the post-regulation period compared to the pre-regulation period. Our empirical results are new and contribute to the research on the PCAOB and audits.