Audit Partner Identification, Assignment, and the Labor Market for Audit Talent

Abstract

Conventional wisdom suggests that partner identification disclosure can improve audit quality, because it may enhance transparency and individual accountability. Building on a two-period assignment model, we show that under certain conditions, the disclosure can distort partner client assignment because the disclosure can inform the labor market for audit talent. In a decentralized assignment regime in which partners directly bid for clients, we find that the disclosure may give rise to low-balling in the first-period, because partners aggressively lower the audit fees to maximize their career advancement. In a centralized assignment regime in which an audit firm assigns partners to clients, audit firms may distort the assignment in order to dampen partners' career advancement. We also find that in the presence of mandatory partner identification, the optimal partner-client assignment regime depends on the distribution of partners' reputations within an audit firm. Overall, our findings identify unintended consequences of audit partner identification disclosure and provide economic reasons for the mixed empirical findings.

Keywords: audit partner identification, assignment, audit quality, audit fee

JEL Classification: M42, M48