The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements

SUMMARY: We study whether audit-partner quality influences the probability of annual report misstatements (measured by restatements) and whether various levels of quality control attenuate such influences. We measure audit-partner quality with audit failure rate (i.e., the total number of audit failures associated with an audit partner divided by the total number of audit reports signed by the same partner). We report the following key findings. First, an audit partner's past audit failure rate is positively associated with the probability that the current year annual report that he/she audits is subsequently restated. This positive association is more pronounced for engagement partners (i.e., partners who actually conduct the audits) than for review partners (i.e., partners who review the audits). Incorporating audit-partner audit failure rates substantially increases the predictive power for future financial report restatements. Second, neither engagement-team-level nor audit-firm-level quality controls...