Working Paper: Does Engagement Partner Perceived Expertise Matter? Evidence from the U.S. Operations of the Big 4 Audit Firms

Paper Author: Daniel Aobdia, Saad Siddiqui and Andrés Vinelli

Research focus: This study investigates whether engagement partner industry specialization matters in the U.S. setting, where the name of the engagement partner is currently not disclosed to capital market participants. Until now, evidence on the impact of audit partner specialization has been limited to settings where the name of the engagement partner is publicly disclosed.  As such, it has remained an unexplored question as to whether, in the U.S. setting, industry specialist engagement partners charge higher audit fees and provide better quality audits than non-specialists.

It seems reasonable to expect that a client may be willing to pay a premium for access to an industry specialist engagement partner. For example, an audit committee or issuer management team may be interested in interacting with such a partner to gain more insights about accounting or auditing practices of other issuers in the industry.  Moreover, if it is true that industry specialist engagement partners command more credibility with their client, audit hours could reasonably be expected to be higher if the industry specialist, in contrast to less experienced partners, is able to successfully shield his or her engagement team from client-driven or audit-firm driven time pressure.

This study provides the first evidence that U.S. Big Four industry specialist engagement partners are indeed able to charge a fee premium.  This premium appears to be driven by a combination of a higher average rate per hour and more audit hours.  The authors also investigate whether engagement partner industry specialization increases audit quality, and find no association between the two.  This result suggests that the observed increase in audit hours associated with industry specialist engagement partners has no noticeable influence on audit quality.

Collectively, specialist engagement partners seem to command some credibility, but their presence does not necessarily increase audit quality.  These results do not necessarily imply that engagement partner industry expertise does not matter from an audit quality standpoint. For example, the results may instead suggest that, absent disclosure of their name, industry specialist engagement partners may have little incentive to audit beyond the baseline imposed by the audit standards in the U.S.