Does Client Acquisition Impair the Objectivity of Engagement Partners and Engagement Quality Review Partners?

Abstract

We conduct two experiments using experienced audit partners as participants to investigate whether engagement partners’ involvement in the client acquisition process as the contact partner can influence their subsequent audit judgments, and whether the engagement quality review partner’s judgments are influenced when he or she is aware that engagement partners play both roles. As predicted, we find that engagement partners who are also the contact partners during client acquisition tend to make judgments that are biased in favor of the client. However, engagement quality review partners are not sensitive to whether the engagement partner was the contact partner or not, but may be motivated to make decisions that favor the engagement partner. Our results provide a deeper understanding of how the client acquisition process influences the judgments of various partners later in the course of audit engagements.

Keywords:

• Engagement partner
• engagement quality review partner
• contact partner
• review process

Acknowledgments

We appreciate helpful comments from two anonymous reviewers, Victor Maas (editor), and seminar participants at Nanyang Technological University.

Data Availability

Data are available from the authors upon request.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 A contact partner ‘establishes the primary contact with a potential client, and if the client is accepted, is regarded as being instrumental in bringing new work to the firm’ (Ayers & Kaplan, 2003: 29, footnote 1). A contact partner’s role is conceptually different from that of a relationship partner. The latter involves building a continuing relationship between the engagement team and the client (Dodgson et al., 2020). A relationship partner continues to be tied to the engagement in some way, and is involved in difficult discussions with the client during the ongoing engagement; in contrast, the contact partner has a much narrower role—in initiating contact with and bringing in the client. A contact partner also differs from business development partner as the contact partner is specific to a new client whereas a business development partner whose primary role is to promote and develop the business of an audit firm as a whole.

2 The Institutional Review Board at the university where the experiment was administered approved the use of human participants for the two experiments reported in this study.

3 Dodgson et al. (2020) suggest that the process of selecting an audit partner as the engagement partner during audit partner rotation is like a ‘beauty pageant,’ and the assigned engagement partner may have had prior interaction with the client in the transition process with possibly some amount of bias toward the client's preferred position.

4 While an audit firm’s management team is usually made up of more experienced partners with most serving various leadership roles, experience is not the only consideration in promoting partners to the management team. Hence, there can be engagement partners with many years of experience who are not part of the firm’s management team.

5 The organization structure of audit firms is a type of professional bureaucracy (Mintzberg, 1980, 1993, 2009) with trained auditors in the operating core. While the professionals control their own work in which autonomy of making judgments is larger than that given to other personnel in the organization, they also tend to maintain collective control of the administrative devices through standing committees or task forces (Mintzberg, 1980, 1993). Management team members are at the ‘strategic apex’ making key decisions and setting goals and targets for groups with different missions (e.g., assurance, quality control). Although audit partners are at the highest point in the pyramid of audit firms, they are generally in the operating core, relative to those at the strategic apex.

6 Although we collect data from participants for both experiments simultaneously, we report two separate experiments so that the exposition for each partner role is clearer. We conducted the experiments in batches as different numbers of partners were available each time at the two audit firms. As a result, the experimental cells were filled up at different times. In each batch of experiments, partners were randomly assigned to one of the five experimental conditions in both experiments. Stoppage of data collection was based on a priori participant recruitment goals, and not driven by recruiting enough participants to achieve statistical significance.

7 Taiwanese auditing standards (AS 46) are similar to ISQC 1 in terms of requiring audit firms to perform quality control review for the conclusions and audit reports made by audit engagement teams and requiring EQR partners to remain objective and independent. Big 4 audit firms also have similar practices and professional guidelines worldwide. The regulatory agency in Taiwan, Financial Supervisory Commission (FSC), performs inspections on audit firms regularly. FSC also administers enforcement sanctions against audit partners should they be found to violate accounting and auditing standards.

8 Like the practice in the U.S., audit committees in Taiwan make auditor selection and retention as well as audit fee decisions. But after all, it is the client’s management, but not audit committee members, that informs the auditors about the decisions and signs the engagement contract with the auditors. Based on this practice, in the case material we described that ‘management of the company agreed to select your firm as the auditor’. Since our participants are partners from two Big four firms, we believe that they are well aware of this practice.

9 To simulate this time and effort experimentally, we could have engaged the audit partners through an exercise where they either spend time interacting with and writing proposals to clients (in the contact partner condition), or they do not (in the not contact partner condition). Because this was not feasible given the time constraint, we instead asked the participants in the contact partner condition to indicate the time and effort they would spend in order to secure an equivalent client. Correspondingly, those in the not contact partner condition were not asked these questions.

10 In both Experiments 1 and 2, we also asked participants questions related to whether they were aware of their tendencies to favor the clients. Results are mixed and likely reflect both the variability in participants’ self-insights and social desirability bias.

11 Throughout the paper, p-values reported are two-tailed unless otherwise stated. We use one tailed p-values for directional tests.

12 We also examine participants’ responses to other inputs to the valuation model, including the upper limits of and the specific discount rates and growth rates. We find no significant differences between conditions in participants’ inputs to these (all p > 0.175, one-tailed). We also find no significant differences in their evaluations of the 10 pieces of evidence seeded in the case (p > 0.134).

13 According to a survey by the Financial Supervisory Commission in Taiwan (2018), the proportion of female partners increased from 36% in 2013 to 38% in 2017 (the latest survey). Our female partners account for 35% in Experiment 1 and 44% in Experiment 2, with the average of 39.5%, which is in line with the survey’s findings.

14 A defensible prior distribution of the parameter estimate is regarded as critical to the analysis (Gelman, 2006; Kruschke, 2015). In the absence of strong a priori beliefs regarding the expected magnitude of the effect, we utilize a Cauchy prior distribution, which has been recommended as a prior in point null hypothesis testing approaches (Jeffreys, 1961).

15 We find no differences for EQR partners in the contact partner versus not contact partner conditions in terms of any of the inputs to the impairment loss judgment: upper/lower limits of the impairment loss adjustment, net ratings of evidence items, as well as the specific/upper/lower limits related to the discount rate and growth rate (all p > 0.12).

Additional information

Funding

This work was supported by Singapore Ministry of Education Tier 2: [Grant Number MOE2019-T2-2-137] and United Overseas Bank Endowed Chair.