A new academic study is calling into question a rule enacted by the Public Company Accounting Oversight Board that requires audit firms to disclose the name of the lead engagement partner who oversaw the audit. The regulation is known as Rule 3211 and took effect in January 2017.
The idea behind the PCAOB rule is that by being publicly named lead engagement partners would have an incentive to ensure that external audits were completed to high standards and would improve audit quality and transparency. For the last year, accounting firms have filed Form AP within 35 days of the publication of a company’s annual report, naming the lead engagement partner.
Now, a new study by four professors indicates that the rule may not be having the intended effect. Assessing the first year of Rule 3211’s implementation, a paper in the current issue of The Accounting Review, a peer-reviewed journal of the American Accounting Association, finds the regulation’s effect to be meager. In the words of the study, results “for eight of nine dimensions of audit quality are not statistically significant, suggesting that trends in quality surrounding January 31, 2017 are not convincingly attributable to the adoption of Rule 3211.” Collaborating on the research were Lauren M. Cunningham of the University of Tennessee, Chan Li of the University of Kansas, Sarah E. Stein of Virginia Tech, and Nicole S. Wright of James Madison University.
No Meaningful Impact
The study’s authors reasoned that if the new rule spurred a boost in audit quality, that change 1) should have been significantly greater for companies that didn’t previously disclose engagement partners than for the early disclosers (who were doing so already), and 2) should have been significantly greater for companies disclosing audit partner identities in Form AP than for those that released their financial reports prior to January 31, and did not have to file Form AP.
The fact that neither turned out to be the case for key measures of audit quality calls into question just how effective the new mandate has proved to be. As the study’s authors write, “we are unable to detect a significant change in audit quality attributable to Rule 3211.”
Measuring Audit Quality
The study uses three principal proxies of audit quality that are favored in the accounting literature – 1) amount of discretionary accruals, non-cash accounting items that are often subjective (such as predictions of future write-offs for bad debts or estimates of inventory valuations) 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.
To enhance the robustness of their findings, the professors add six further measures of quality, only one of which (a measure of timeliness in recognizing expenses and losses) appears to have been significantly improved by the new regulation. In all, eight of nine measures do not show significant improvement.
The professors offered two reasons why the rule may not be having an impact on audit quality: “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.”
While the research may indicate that the rule isn’t necessarily leading to higher quality audits, they do admit that it may be too early in the process to detect an improvement, and they suggest more research should be conducted to investigate the long-term effects of the regulation. 
Joseph McCafferty is Editor & Publisher of Internal Audit 360°