Audit partner life cycle and implications for audit quality

Abstract

This thesis examines how audit partners change over their life cycle and how those changes affect audit quality. Study 1 investigates whether human capital investment changes as audit partners become more experienced and whether an increase in the partners’ career horizon can motivate them to invest more in human capital. I find that, as audit partners gain experience, both Big N and non-Big N partners charge a small fee premium for their experience but allow more accruals to be reported by clients. However, Big N partners are more likely to issue going concern opinions as they gain experience, while non-Big N partners are less likely to do so. I also find weak evidence for the effect of postretirement work on partner performance. Study 2 investigates how the incentive to invest in industry specialisation differs from general human capital and its implications for audit quality over partners’ life cycle. The results show that audit partners demand a fee increase for another year’s experience when they are industry specialists working within their specialisation (3.2% - 5.5% per annum), which is higher than when they work outside their specialisation (1.9% - 2.3% per annum). In comparison, nonspecialists receive an annual fee increase of 2.3% - 3.6%. The results show that audit partners allow clients to report higher levels of absolute value of accruals as they are more experienced, regardless of whether they have a specialisation or not, which is sensitive to the control of the GFC and its aftermath. The results also show that specialist partners are more effective at restraining their clients from earnings management as they become more experienced, but only when they work within their specialisation and not when they work outside their specialisation. Findings from the thesis have implications for practitioners and regulators. Audit firms may consider 1) costs and benefits of their partner early retirement policies and 2) providing additional support for less experienced partners to ensure high audit quality. Regulators from quality review programs may target engagements audited by less experienced partners and/or those audited by industry specialists working outside their specialisation as warranting their attention.