Effects of new clients on the audit quality of an audit partner's existing portfolio
Abstract
Using AP forms filed with the PCAOB between 2017 and 2021, I find that audit partners on new engagements experience attention costs that adversely affect the audit quality of their existing engagements. The existing engagements of a distracted partner have higher discretionary accruals and lower working capital accruals quality. Further analysis reveals that audit firm changes, rather than partner-only changes, drive the negative effects, suggesting that the engagement team's client-specific experience reduces the attention cost an audit partner experiences from a new engagement. In cross-sectional analysis, I find that audit firm tenure, audit firm size, and audit office industry specialization also mitigate the adverse effects of new clients. The attention costs resulting from new clients are distinct from partner busyness measured by the total number of clients. My findings highlight a negative consequence of audit firm rotation and show that new clients impose attention costs on audit partners that adversely affect the audit quality of their existing engagements.
Degree
Ph. D.