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Tainted by Association? Non-sanctioned Signing Partners and Reputation Loss Following Enforcement Action against Audit Clients

We address an unintended consequence related to the disclosure of the name of the audit engagement (signing) partner. Specifically, we examine whether signing partners in China experience reputational harm following regulatory sanctions against their client even when regulators hold the signing partners (and the audit firm) to be non-culpable for the client’s misconduct. We find that non-sanctioned signing partners of sanctioned clients suffer reputation loss over a three-year period following the sanction announcement as measured by a decline in the likelihood of client gain, an increase in the likelihood of client loss, and a decline in audit fees earned from continuing clients. In addition, we find the losses for non-sanctioned signing partners to be economically meaningful not only for accounting-related but also for non-accounting-related misconduct by the client. Moreover, we find that non-sanctioned signing partners suffer reputation loss even when they are associated with a sanctioned client only at the time of the sanction announcement and not during the years of the underlying client misconduct that triggered the sanction. We discuss the importance of examining reputational consequences at the individual partner level, and whether our findings are likely to generalize to the US. Collectively, our findings suggest a disquieting prospect for audit engagement partners in the US, and are of potential interest to the PCAOB in the context of its post-implementation review program and in identifying unanticipated consequences associated with mandatory engagement partner identity disclosure in the US.

Speaker: Dr Like Jiang
Senior Lecturer, The University of Melbourne
When:
3.30 - 5.00 pm
Venue: School of Accountancy Level 2, Seminar Room 2-5
Contact: Office of the Dean
Email: SOAR@smu.edu.sg