title: Three Studies on Individual Signing Auditors
Creators: name: Zhao, Menghe
Publisher: name: The Australian National University
Year: 2024

description: This thesis comprises three studies which have an overarching aim of enhancing our understanding of the influence of individual signing auditors on capital markets. Study One investigates when and how audit partner identity is informative to market participants by examining the association between audit partner quality (APQ) and analysts' reactions to news in earnings announcements and factors that influence this association. Using a sample of Australian listed audit clients and measuring APQ using their personal fixed-effects on client historic abnormal accruals, I find that analyst forecast revisions in response to earnings surprises are stronger when clients employ audit partners of superior quality. I further show that the positive association between APQ and responses to earnings surprises begins to emerge when partners have a track record of between four and six years auditing listed clients, and that this effect concentrates in analysts with greater forecasting experience. Results also suggest that clients of high-quality audit partners make non-GAAP earnings adjustments that are less predictive of future cash flows (i.e., less persistent), indicating a potential channel through which APQ influences analyst forecast revisions. Study Two examines the impact of signing auditors' task-specific expertise in complex accounting estimates on clients' asset impairment decisions. Using a sample of Chinese listed companies from 2018 to 2021, I find a positive association between signing auditors' career impairment-related KAM disclosures and clients' likelihood (magnitude) of recognizing asset impairments in the current year. I also find that the timeliness of impairments increases with the number of impairment-related KAMs disclosed by these auditors during their careers. I further show that signing auditors' career impairment-related KAMs specific to the focal client and those for other clients are both positively associated with the incidence (magnitude) of asset impairments, and that the impact is significantly larger for the client-specific component. However, results for the impairment timeliness tests are only significant for the client-specific component. Collectively, Study Two enhances our understanding of how individual signing auditors' task-specific expertise in complex accounting estimates influences clients' asset impairment decisions. Study Three is an exploratory paper investigating whether and how the individual fulfilling the engagement auditor role impacts audit quality. Audit reports of Chinese listed companies are required to be signed by two certified auditors: the engagement partner (EP), who conducts the final review of an audit, and the engagement auditor (EA), who leads the audit team through the fieldwork. Using a sample of Chinese listed companies for which EAs and EPs can be credibly identified from their audit reports, I find that the inclusion of EA fixed-effects significantly increases the explanatory power of the model that estimates several audit quality proxies. I also find that the probability of restatement of EAs' current clients' financial statements is positively associated with the restatement rate of their prior clients, and that this association is significantly weaker when EAs are paired with EPs of superior quality. Overall, findings in Study Three provide exploratory evidence on the critical role of individual auditors below the partner level in determining audit quality.