Working Paper: What's in a Name? Reputation and Monitoring in the Audit Market

​​​​​​Paper authors: Somdutta Basu and Suraj Shekhar

Research focus: This paper investigates reputational incentives in the audit market and, in particular, how reputational incentives change when the identity of the engagement partner is disclosed.

Large audit firms comprise many partners. Because partners are individuals with different skills, experiences and styles, it is perhaps unsurprising that audit quality is seen to vary across audit engagements of a firm.

In the United States, the names of individual engagement partners have not, historically, been publicly disclosed. As a consequence, the overall collective reputation of an audit firm depends, in large part, on the behavior of its individual partners. Moreover, the collective reputation of an audit firm is shared by all of its partners.

In an effort to provide increased transparency and accountability, on December 15, 2015, the Public Company Accounting Oversight Board adopted new rules requiring audit firms to file a new form for each issuer audit, disclosing the name of the engagement partner.

Motivated by this change, this paper sets forth a theoretical model that describes the reputation incentives of audit partners under two regimes, one in which the name of the audit partner is disclosed and one in which it is not. Without disclosure, the aggregate reputation of the audit firm is the key incentive, whereas with disclosure, the focus shifts to individual partner reputation.

In addition, the authors studied the incentives of monitoring partners, whether an engagement quality review partner or a 'successor' partner, one that will replace the audit partner after the mandatory five year limit as lead partner in an engagement.

While the model suggests that disclosure of an audit partner'​s name generates incentives for the partner to build his or her own reputation by performing high quality audits, it also predicts that engagement quality reviewers and successor audit partners may have reduced incentives to monitor.

Download the Paper