The Consequences of Dividing Responsibility for an Audit Engagement

Abstract

We investigate whether dividing responsibility for an audit engagement results in consequences to the principal auditor or audited company. We find that principal auditors are less likely to be named as defendants in restatement-related class action litigation and shareholders are less likely to initiate restatement-related litigation against the company when the principal auditor divides responsibility. We also find that principal auditors who divide responsibility are more likely to be replaced with a new auditor. Our findings should be informative to the PCAOB who recently decided to retain the principal auditor’s option to divide responsibility, help explain why principal auditors infrequently divide responsibility, and support stakeholder concerns that adding division of responsibility to the audit report could reduce auditor accountability for low-quality auditing.