Do Investors Care Who Did the Audit?

In 2008, the U.S. Department of the Treasury’s Advisory Committee on the Auditing Profession called for a “standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report” as a way to increase audit transparency.[1] The Public Company Accounting Oversight Board (PCAOB) considered this call, weighing investor benefits (e.g., increased transparency) against potential costs to the audit profession (e.g., increased litigation risk and administrative costs). After considerable discussion with registrants, investors, and audit firms, the PCAOB responded in December 2015 by enacting Rule 3211, Auditor Reporting of Certain Audit Participants.

The new rule mandates that auditors file Form AP for public company audit reports issued on or after January 31, 2017. The requirements are phased in such that the initial disclosures include only the name of the audit engagement partner. After June 30, 2017, however, Form AP must also include the name, location, and extent of participation of other auditors. These new disclosures represent the most substantial increase in auditor transparency in recent U.S. history. So far, however, these new disclosure requirements do not appear to be having a broad-based impact on investors.

The new Form AP disclosures are intended to provide information about the individuals and entities responsible for completing the audit so that investors can better evaluate audit quality.[2] There are persuasive arguments as to why the engagement partner’s identity might matter to investors. For example, knowing who is responsible for the audit allows investors to assess the engagement partner’s reputation, experience, and workload. The engagement partner’s identity could signal industry expertise or warn investors of troubling issues such as prior client restatements. In fact, academic research in international settings suggests that partner names might be informative about audit quality.[3] On the other hand, audit firms argue that quality controls and the collaborative nature of audits produce stable audit quality across the firm. Further, the U.S. has a relatively strict regulatory environment that promotes the standardization of audits. If audit partners can’t be differentiated by quality, then disclosing the engagement partner’s identity on Form AP would not be useful for investors.

Form AP also requires audit firms to disclose information about work done by outside audit participants. For example, auditors of multinational clients often rely on foreign audit firms to complete the non-U.S. portion of the audit. However, prior to the disclosures in Form AP, investors had little insight into the extent of the audit work performed by the lead auditor relative to other participating auditors. This is a critical piece of new information for investors, because there are compelling reasons to believe that information about work done by outside auditors will be informative to investors. For example, recent research concludes that multinational and group audits are difficult for lead auditors to coordinate and can diminish audit quality.[4] Thus, some investors may perceive that the mere presence of outside auditors lowers audit quality. Similarly, the outside auditor’s location might be informative. For example, audits performed in jurisdictions where the PCAOB has no inspection authority might also be perceived as lowering audit quality.[5] On the other hand, the extent of outside auditor participation might be viewed as improving audit quality. For instance, the outside auditor might be better than  the lead auditor. Regardless of whether investors believe outside auditor participation is harmful or helpful to audit quality, the new information is potentially informative.

We examine whether the new disclosures matter to investors by testing the market response to Form AP filings as measured by the number of transactions or the volume of shares traded. Because auditors do not systematically issue Form APs with other confounding disclosures such as earnings announcements or annual reports, we are able to isolate the market’s reaction to Form AP and look for  trading spikes, which would suggest that investors react to the new disclosures. In our tests, we find no significant spikes around the release of Form AP, suggesting that, on average, investors do not find the disclosures in Form AP to be informative.

After looking for a general reaction to Form AP, we separately test more specific cases where we expect the new disclosures to be the most informative. In particular, we examine cases where the lead engagement partner changes from the prior year, where the client changes to a partner with industry expertise, and where the lead engagement partner has been associated with a financial restatement. In addition, we examine circumstances where the outside auditors perform an atypically large portion of the overall work or where the outside auditor operates in a country that is not subject to inspection by PCAOB. Critically, even in these cases where we expect the information in Form AP to be the most informative, we find no significant spikes in trading. Collectively, our tests suggest that Form AP has not had a significant impact on trading. It may be that Form AP disclosures will become more useful to investors as more data become available, but for now, there is no evidence that investors react to who performed the audit.


[1] U.S. Department of the Treasury – Advisory Committee on the Auditing Profession (ACAP). 2008. Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury. Available at:

[2] PCAOB. 2015. Improving the Transparency of Audits: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards. PCAOB Release No. 2015-008 (December 15). Available at:

[3] Knechel, R. W., A Vanstraelen, and M. Zerni. 2015. Does the identity of engagement partners matter? An analysis of audit partner reporting decisions. Contemporary Accounting Research 32 (4): 1443-1478.

Chi, W., L. A. Myers, T. C. Omer, and H. Xie. 2017a. The effects of audit partner pre-client and client-specific experience on audit quality and on perceptions of audit quality. Review of Accounting Studies 22 (1): 361-391.

[4] Downey, D. H., and J. C. Bedard. 2018. Coordination and communication challenges in global group audits. Auditing: A Journal of Practice & Theory (forthcoming).

[5] Lamoreaux, P. T. 2016. Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the united states. Journal of Accounting and Economics 61 (2/3): 313-337.

This post comes to us from Marcus M. Doxey, James G. Lawson, Thomas J. Lopez, and Quinn T. Swanquist at the University of Alabama’s Culverhouse School of Accountancy. It is based on their recent paper, “Do Investors Care Who Did the Audit? Early Evidence of the Informativeness of Form AP,” available here.