Audit Partner Disclosure: Potential Implications for Investor Reaction and Auditor Independence

1. Conference on Regulation and the Audit Industry Audit Partner Disclosure: Potential Implications for Investor Reaction and Auditor Independence Tamara A. Lambert Benjamin L. Luippold Chad M. Stefaniak

2. Outline Tamara Ben Hypotheses Method Participants Procedures Design Variables Results Investment choice Allocation Mediation analysis Experience Conclusion • PCAOB • Audit partner disclosure • Proponents / opponents • Where disclosure occurs • Research question • Model of audit independence • Three propositions

3. PCAOB: Audit Partner Disclosure

4. PCAOB: Audit Partner Disclosure

5. Where Partner Disclosure Occurs

6. Will disclosing the identity of the audit partner in the audit report lead to improved audit quality / investor protection? Research Question

7. Model: • Audit Partner Identity Disclosure • Potential Audit Partner Independence Impairment • Audit partner disclosure may lead to independence impairment • Three propositions

8. Model: Proposition 1 • Audit Partner Identity Disclosure • Fusing of Partner Reputation with Client • No well-calibrated measures available (Francis 2004) • Accounting information transfer (Gleason et al. 2008) • Representativeness heuristic (Kahneman 2011)

9. Model: Proposition 2 • Audit Partner Identity Disclosure • Fusing of Partner Reputation with Client • Audit Partner Incentive Shift • Ill-informed partner-related inferences may lead to • Increased focus on individual reputation • Client attraction / retention concerns • Audit / earnings quality proxies used by academics

10. Model: Proposition 3 • Audit Partner Identity Disclosure • Fusing of Partner Reputation with Client • Audit Partner Incentive Shift • Potential Audit Partner Independence Impairment • Auditors role to reduce information risk • Conflicting investor / management incentives • Increased prominence of individual reputation • Implicit permission for individuals to act in their own interests (Hunton et al. 2011)

11. Hypothesis 1 • Information transfer as a proxy for reputation fusing • Negative information is contagious • Firms within an industry (Gleason et al. 2008) • Firms audited by Arthur Andersen (Huang and Li 2009) • Firms that share a common director (Chen and Goh 2010) • Representativeness may play a role (Kahneman 2011)

12. Audit partner identity disclosure will result in partner-based (reputational) information transfer between reporting entities. Hypothesis 1

13. Hypothesis 2 • Would partner disclosure require other changes to audit report? (PCAOB 2009) • Partner signing firm’s name is evidence that audit report is product of the firm (PCAOB 2008, 2009) • Partner disclosure could confuse investors about what audit opinion means • Less knowledge = more reliance on representativeness (Gigerenzer and Goldstein 1996)

14. Modifying the audit report with language intended to highlight the audit firm’s responsibility for the audit will reduce the amount of partner-based (reputational) information transfer resulting from audit partner identity disclosure. Hypothesis 2

15. Method: Participants 380 participants Investment clubs and Qualtrics ≈ 4 years experience w/ fin. info. ≈ 48 years old All have investing experience

16. Method: Procedure

17. Method: Procedure

18. Method: Procedure

19. Method: Procedure Audit Opinion Note. Each audit firm stresses in its audit reports that while the audit opinion is signed by both the audit partner and the audit firm, the audit opinion represents that of the entire firm. Additionally, each firm notes that the audit involves many firm employees and includes technical guidance and other resources from its national headquarters.

20. Method: Experimental Design

21. Method: Variables Main Variables Supplemental Variables Financial information importance Fault (company, firm, partner) Influence of restatement Familiarity w/ financial information & auditing Attention checks Investment experience Experience w/ financial information Job title / employer Gender Age • Investment choice • Investment allocation • Restatement likelihood

22. Results: Investment Choice

23. Results: Investment in US Tech.

24. Results: Investment in US Tech.

25. Results: Allocation in US Tech.

26. Results: Mediation Analysis RESTATE_UST b= -0.113 (p = 0.022) b= 0.611 (p = 0.057) b= -0.559 (p = 0.041) b= -0.559 (p = 0.041) PARTNER INVEST_UST b= -0.509 (p = 0.059)

27. Results: Invest. in US Tech. by Exp. Less Experienced Investors More Experienced Investors

28. Results: Invest. in US Tech. by Exp. Less Experienced Investors More Experienced Investors

29. Conclusions • Model • Partner disclosure will fuse reputation with client • Fusing will shift audit partner incentives • Shift of incentives may impair independence • Experiment • Partner disclosure results in information transfer • Contagion not mitigated by our report modification

30. Conference on Regulation and the Audit Industry Thank you Tamara A. Lambert Benjamin L. Luippold Chad M. Stefaniak