The role of the audit partner in the auditor-client economic bond, auditor rotation and auditor workload

Abstract

This thesis contains the outcome of three separate, but interrelated, empirical analyses on the role of the individual audit partner in the auditor-client economic bond, auditor rotation and auditor workload. The first analysis examines the demand and supply factors associated with the role of the audit partner in the auditor-client economic bond. Specifically, the study examines whether (1) high fee-paying clients consider audit partner quality when appointing an auditor and (2) audit partners compromise their independence for economically important clients. The findings show that, while audit partners influence audit outcomes, clients do not pay above the expected audit fees, either to select low-quality partners to enable them to manage their earnings, or high-quality partners as a way of signalling the strength of their financial statements. The results also show no evidence to suggest that partners compromise their independence for economically important clients, in spite of the possible rewards attached to how much revenue they generate. Together, the findings support the suggestions that the increased regulation of partner activities and improved corporate governance, within the UK, has lessened concerns regarding excessive fees and low audit quality. The second empirical analysis examines the cost/benefit consideration of the requirement for a mandatory partner rotation, with (without) a simultaneous firm change. Prior research conducted on mandatory auditor rotation has been focussed either at the partner or firm level, without recourse to the net incremental benefits (cost) associated with the requirement for both layers of rotation over a single rotation rule. Given the long-standing debate regarding the relative benefits of mandatory auditor rotation, this study aims to provide key contributions that will help to advance policy formulation on the subject. The findings of the study show that the requirement for mandatory partner rotation, without a simultaneous firm change (single rotation), helps to control opportunistic earnings management. In addition, the study observes that, while there exists no evidence of audit quality improvements when mandatory partner rotation is required concurrently with a firm change (dual rotation), there is a significant increase in audit fees. Taken together, these findings provide evidence that the requirement for mandatory partner rotation (but not firm rotation) is associated with increased audit quality. Moreover, the requirement for dual rotation, while offering no improvements to audit quality, could lead to increased audit fees - a key reason as to why dual rotation is not practiced universally. The third and final empirical analysis of this thesis examines the role of the audit partner workload in the audit committee’s auditor selection and retention process. Policymakers posit that the agreement and use of key audit quality indicators by auditing stakeholders could provide insights into the principles of audit quality, whilst also creating incentives for competition that will enhance audit quality. Highlighting the informational value of partner workload in the audit committee’s auditor selection and retention process, policymakers have called on researchers to examine the validity of such indicators in relation to improving audit quality. This section represents a response to this call, by examining the association between audit committee effectiveness (size, independence, and expertise) and audit partner workload. The findings show that two (size and independence) out of the three measures of audit committee effectiveness are positively associated with partner workload. The findings from the study provide novel evidence of the signalling ability of partner workload in the auditor selection process. Drawing on the existing literature on partner workload, the findings suggest that a heavy workload could be indicative of a partner's ability to manage multiple clients and to perform high quality audits.