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Does Naming the Lead Auditor Improve Audit Quality?


A recent study raises doubt that Rule 3211, Auditor Reporting of Certain Audit Participants, has produced the intended benefits. The Public Company Accounting Oversight Board (PCAOB) issued the rule at the end of 2015. It requires accounting firms to identify the name of the engagement partner in an audit of a public company. Investors had pushed for the rule, saying that auditors’ performance would improve if they knew that their names would be made public.

A controversial effort

Disclosing the lead auditor is required under Securities and Exchange Commission (SEC) Release No. 2015-008, Improving the Transparency of Audits: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards. The disclosure is made on Form AP, “Auditor Reporting of Certain Audit Participants.” It must be filed within 35 days of the submission of the audited company’s 10-K filing.

Rule 3211 went into effect in 2017. However, approval of the final version took several years of effort because of industry opposition. On the one hand, investors argued that publicizing lead audit partner names would raise accountability among auditors, make them more careful in their work and provide an incentive to resist pressure from clients to bend accounting standards. Investors also felt that the rule would help them track an individual partner’s work over time.

On the other hand, audit firms generally opposed the lead-partner disclosure requirement. They argued that audit partners are accountable to multiple parties, and these disclosures would raise their liability risks under securities laws. In turn, such increased liability risks could translate into higher audit fees.

Follow-up study

A recent study of the effectiveness of Rule 3211 was published in the September/October 2019 issue of The Accounting Review. The authors include Lauren Cunningham of the University of Tennessee, Chan Li of the University of Kansas, Sarah Stein of Virginia Tech and Nicole Wright of James Madison University. They concluded, “Overall, we are unable to detect a significant change in audit quality attributable to Rule 3211 when evaluated along [several dimensions, including the] propensity to misstate and the likelihood of issuing an incorrect material weakness opinion.”

The study did find that audit quality improved during the implementation period. “Results indicate that several of the proxies of audit quality…increased in the first year of Rule 3211,” the study said, continuing similar improvement in the previous year. But, when the researchers looked deeper, the findings suggested that whatever improvement may have been occurring had little to do with Rule 3211.

To study the matter, they used two control groups of public company audit clients:

  1. The “early discloser” sample. This group consisted of companies in the Standard & Poor’s 1,500 index that disclosed audit engagement partners in the year before Rule 3211.
  2. The “pseudo adopter” sample. This group consisted of all companies that issued their annual reports in the months prior to January 31, 2017. These companies didn’t have to identify the lead audit partner.

The researchers determined that, if Rule 3211 had brought about better audit quality, that change should have been significantly greater for companies that didn’t previously disclose the engagement partners than for the early disclosers. The increased audit quality should have also been significantly greater for companies disclosing audit partner identities in Form AP than for the pseudo adopters. But neither was the case.

The study used three principal proxies of audit quality:

  1. Amount of discretionary accruals (noncash accounting items that are often subjective and are considered particularly subject to manipulation),
  2. F-scores (measures of companies’ propensities to misstate earnings), and
  3. Mistaken assessments of firms’ internal controls over financial reporting.

The researchers added six proxies to make their findings more credible. But eight of nine measures didn’t show significant improvements.

The study provided two reasons Rule 3211 hasn’t led to audit quality improvements. “First, accounting firms argued that partner accountability was already sufficiently high prior to mandatory disclosure, such that partner identification would not induce additional improvements to audit quality. Second, the final adoption of Rule 3211 required audit partner disclosure in Form AP, which…may not pervasively affect partners’ sense of accountability as the PCAOB originally intended.” The PCAOB originally wanted the audit engagement partners to sign their names, not just be identified in a different form that most people will not look up.

Stay tuned

The authors of the study caution that their findings provide only initial evidence. Further research will be necessary to evaluate other potential effects of the rule. Depending on future research, the PCAOB may revise Rule 3211 to achieve the intended results — or abandon it if the costs outweigh the benefits.


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