Sarah Stein's Research Casts Doubt on Value of PCAOB Regulation Regarding Audit Partner Disclosure
October 14, 2019
Sarah Stein, and co-authors Lauren M. Cunningham of the University of Tennessee, Chan Li of the University of Kansas, and Nicole S. Wright of James Madison University are making headlines with their recent research regarding Public Company Accounting Oversight Board (PCAOB) Regulation 3211. This regulation, first proposed in 2009 and implemented in 2017, requires auditing firms to disclose the names of the engagement partners who participated in an audit.
The goal of the regulation was to improve audit quality, however, Dr. Stein and her co-authors found 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.”
Ben Haemowitz with the American Accounting Association said their research study employed "some ingenious analysis" to develop these findings. The premise of the study is, "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 the pseudo adopters, which released their financial reports prior to January 31 and did not have to file Form AP." Since neither of these were found, Dr. Stein and her coauthors concluded “we are unable to detect a significant change in audit quality attributable to Rule 3211.”
These new findings will likely spur renewed interest in the contentious Rule 3211. The Wall Street Journal published the following quote from Dr. Stein: “The more years of this rule that researchers can study, the more informational value and historical trends in performance will be provided.”
This study, entitled "What’s in a Name? Initial Evidence of U.S. Audit Partner Identification Using Difference-in-Differences Analyses," is in the September/October issue of The Accounting Review, a peer-reviewed journal published six times yearly by the American Accounting Association.