Tell us your name, Mr. Auditor

The typical audit report is signed off with just the name of the auditing firm and the office from where the audit was managed. For example, you will see something like “PricewaterhouseCooper”, and underneath “New York”. Floyd Norris, who writes about accounting and finance for The New York Times, discusses some fascinating academic research on this topic in a recent column.

In a paper in the September-October issue of The Accounting Review,  two accounting professors, Joseph V. Carcello of the University of Tennessee and Chan Li of the University of Pittsburgh, looked at what happened in Britain after that country began requiring audit partners to be identified in 2009. They examined audits of the same company in the year before the disclosure and the first year of the disclosure.

They found that after the partners knew their names — and not just the name of their firms — were going to be disclosed, auditors were more likely to issue qualified opinions and less likely to sign off on audits with managed earnings. The numbers reported by companies after the change tended to provide better indications of future cash flows than had been the case.

“Our results,” they concluded, “are consistent with the argument that requiring an individual audit partner to sign a report improves audit quality by increasing the partner’s accountability and transparency of audit reporting.”

Such identification of auditors has been going on for many years in Sweden. This enabled a group of academics to study audits of different companies done by the same partners of the Swedish affiliates of the Big Four firms. Their findings?

They concluded that companies audited by an individual partner, even in different industries and over time, tend to show similar “reporting aggressiveness and conservatism.”

Even more interesting is their finding that investors notice. Companies with more lenient auditors have to pay more to borrow money, and public companies with such auditors trade at lower valuations than do companies whose auditors have earned better reputations.