European Accounting Review
ISSN: (Print) (Online) Journal homepage: www.tandfonline.com/journals/rear20
Does Client Acquisition Impair the Objectivity of
Engagement Partners and Engagement Quality
Review Partners?
Ian Chan, Rong-Ruey Duh & Hun-Tong Tan
To cite this article: Ian Chan, Rong-Ruey Duh & Hun-Tong Tan (2024) Does Client Acquisition
Impair the Objectivity of Engagement Partners and Engagement Quality Review Partners?,
European Accounting Review, 33:1, 171-190, DOI: 10.1080/09638180.2022.2074493
To link to this article: https://doi.org/10.1080/09638180.2022.2074493
Published online: 26 May 2022.
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European Accounting Review, 2024
Vol. 33, No. 1, 171–190, https://doi.org/10.1080/09638180.2022.2074493
Does Client Acquisition Impair the
Objectivity of Engagement Partners and
Engagement Quality Review Partners?
IAN CHAN∗ , RONG-RUEY DUH∗∗ and HUN-TONG TAN∗
∗ Nanyang Business School, Nanyang Technological University; ∗∗ Department of Accounting, Tunghai University
(Received: 26 January 2021; accepted: 31 March 2022)
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
1.
Introduction
During the client acquisition process, an audit partner in the audit firm may approach and
interact with a prospective client with the goal of ultimately securing an audit engagement with
the client. Such a partner is generally called a contact partner,1 and may or may not become the
engagement partner for the newly acquired client depending on the schedule, workload, industry
expertise and potential conflict of interest (Ayers & Kaplan 2003, see also Section 3 for related
interview evidence). When a contact partner is assigned as the engagement partner, it constitutes
a dual role case in which the engagement partner is also the contact partner. In this study, we
Correspondence Address: HUN-TONG TAN Nanyang Business School, Nanyang Technological University. Email:
AHTTAN@ntu.edu.sg
Paper accepted by Victor Mass.
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.
© 2022 European Accounting Association
172 I. Chan et al.
first investigate whether the prior involvement of the engagement partner in the client acquisition
process influences the engagement partner’s judgments later on in the audit. To ensure the quality
of judgments made by the engagement team, AS 1220 (PCAOB, 2009) and ISQC 1 (IAASB,
2009) require that audit firms appoint an engagement quality review partner (EQR partner; also
known as concurring partner or review partner, see Epps & Messier, 2007) to review the work
done by the engagement team and conclusions reached by the engagement partner. International
Standards on Quality Management 2 (ISQM 2, IAASB, 2020) prescribes the appointment and
eligibility of EQR partners and their responsibilities. EQR partners are required to be independent
and objective, however, whether and when the judgments of EQR partners are influenced by their
awareness of the dual role of the engagement partner is unknown. We also examine this issue in
the study.
Contact partners expend significant effort during the client acquisition process in contacting
and interacting with the client to build a relationship with the client. Often, the contact partner must build rapport with the client in order to better understand client needs to develop a
competitive bid that might help win the business for the audit firm (Fiolleau et al., 2013) and
to better understand risks associated with the client. Psychology theory on motivated reasoning (Kunda, 1990) suggests that as a result of the effort contact partners put in to acquire a
client, they develop a self-interested directional goal to ensure that the client remains a client
of the audit firm, which can impair their objectivity if they serve as the engagement partner
for the client. Hence, we expect that engagement partners who have been contact partners
for the engagement make judgments more favorable to the client than engagement partners
who are not contact partners. Examining this question is important for the following reasons.
Firstly, interviews with partners in Big 4 firms reveal that contact partners frequently go on to
become engagement partners due to greater familiarity with and understanding of the client, and
the client’s trust in contact partners. Secondly, some jurisdictions have recently implemented
mandatory audit firm rotation (EU, 2014) or are contemplating other alternatives such as auditor re-tendering, which may lead to increased opportunities of the dual role of engagement
partners being contact partners as firms tender for clients more often. Lastly, audit firms are
paying increasing attention to the client acquisition process in the face of higher litigation risk.
Yet, current auditing standards are silent on whether contact partners can serve as engagement
partners.
We next examine whether EQR partners, a higher-level audit quality control mechanism within
the audit firm, are susceptible to influence from the assignment of contact partners as engagement
partners. AS 1220 (PCAOB, 2009), ISQC 1 (IAASB, 2009) and ISQM 2 (IAASB, 2020) require
that audit firms appoint an EQR partner to review the work done by the engagement team and
conclusions reached by the engagement partner. The EQR partner is often the last reviewer in the
audit engagement, and the last line of defense in terms of the quality control mechanism within
the audit firm. Given the salience of the quality control aspect of this role, EQR partners likely
have an accuracy goal (Kunda, 1990) and are objective in their audit judgments, whether the
audit workpapers they are assessing are or are not under the charge of an engagement partner who
has been the client’s contact partner. However, EQR partners also have career concerns, which
can induce self-interested directional goals that overwhelm any existing accuracy goals. We test
our prediction that EQR partners adopt an engagement partner’s self-interested directional goals
to acquiesce to client’s preferences when the engagement partner is a member of the firm’s
management team.
We experimentally test three related predictions in two experiments with audit partners from
Big 4 firms in Taiwan as participants2 : (a) bias induced by the self-interested directional goal
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.
Does Client Acquisition Impair the Objectivity of Engagement Partners
173
of an engagement partner who is also the contact partner (H1, Experiment 1), (b) objectivity
induced by the accuracy goal of an EQR partner aware of this dual role of the engagement partner (H2, Experiment 2), and (c) incremental bias induced by the self-interested directional goal of
an EQR partner’s career concern when the dual-role engagement partner is also part of the audit
firm’s management team (H3, Experiment 2). The case setting involves goodwill impairment
on a client’s investment in a subsidiary. Specifically, the in-charge audit manager deems that a
material goodwill impairment, amounting to over half of the recorded goodwill, is required but
the client wants to minimize any impairment. We ask the participants to decide on the amount of
goodwill impairment to be recorded. Other than the information on the manipulations, all other
information is held constant across conditions, except that participants in the role of EQR partners are also informed of the assessment made by the engagement partners. This design allows
our design to be representative of the practice in which EQR partners review the judgments made
by the engagement partners.
We first conduct a 2 × 1 between-participants experiment where participants are informed that
they are the engagement partner on the audit. Our manipulation involves informing participants
that they either are or are not the contact partner for the client. We find that engagement partners
who are also the contact partners for the client require less goodwill impairment loss compared
to engagement partners who are not the contact partners for the client. We then conduct a 3 × 1
between-participants experiment where participants are informed that they are the EQR partners
on the audit. In this experiment, we manipulate the engagement partner role at three levels – the
engagement partner is the contact partner, the engagement partner is not the contact partner, and
the engagement partner is the contact partner as well as a member of the firm’s management
team. We find that in the first two conditions, EQR partners require similar amounts of goodwill
impairment loss whether the engagement partner is the contact partner for the client or not.
However, we find that when the engagement partner is a contact partner for the client as well as
a member of management team at the firm, EQR partners also make judgments that are more in
line with the impairment decisions made by the engagement partner, even if these decisions are
consistent with relatively aggressive client preferences.
Our study informs research and practice in several ways. We provide causal evidence that
the judgments of engagement partners can be influenced by their initial role as contact partners.
Extant research examining the client acquisition process has focused mainly on how the risk
profile of a client influences the client acceptance decision (e.g. Ayers & Kaplan, 2003; Johnstone
& Bedard 2003; Favere-Marchesi & Emby, 2005; Fiolleau et al., 2013). None has examined
whether the client acquisition process can influence subsequent audit judgments. We contribute
to extant accounting literature on client acquisition by providing the first evidence that being part
of the client acquisition process can influence audit partners to favorably evaluate the client’s
decisions.
Given that contact partners often go on to become the engagement partner; our study suggests
a practice to mitigate the bias by separating the role of contact partners from that of engagement partners. Such a practice already exists but only in cases where contact partners’ workload,
work schedules, industry expertise or potential conflict of interest prevents them from serving as
engagement partners. Our findings are also informative for regulators in jurisdictions that have
mandated audit firm rotation (European Union, 2014) or are considering other less onerous alternatives such as re-tendering (PCAOB, 2012). Critics of mandatory audit firm rotation argue that
this would lead to audit firms tendering for engagements, and therefore engaging in client acquisitions more often (see PricewaterhouseCoopers, 2011; Stringer, 2011). Our study provides some
evidence that this may unintentionally facilitate aggressive reporting by clients.
174 I. Chan et al.
This study also contributes to the literature on the role of EQR partners, a role mandated by
auditing standards. While prior studies have examined issues related to EQR partners’ objectivity (Schneider & Messier, 2007), we provide evidence that EQR partners’ judgments are not
influenced by whether the engagement partner was the contact partner or not. Additionally, we
also extend prior literature examining the judgments of EQR partners by showing that a selfinterested directional goal from internal professional relationships can cause EQR partners to
make judgments that are in support of the engagement partner compared to a situation when they
have no such motivation. By extension, we also contribute to the broader literature on the audit
review process. While existing research documents that preparers of audit judgments collect evidence and evaluate evidence in a manner consistent with the preferences of reviewers (Peecher,
1996; Turner, 2001; Wilks, 2002), our study provides evidence that review partners can also
evaluate evidence in a manner consistent with that of preparers, given sufficient motivation to
do so (see also Rich, 2004 in a senior-preparer/ manager-reviewer setting). In light of these findings, audit firms may consider using review partners that are at least equal in seniority or rank to
engagement partners in order to mitigate the impact of such occurrences.
The remainder of this paper includes background and hypothesis development in Section II,
the interview evidence in Section III, the experimental design and results of Experiment I in
Section IV, and the experimental design and results of Experiment II in section V. Section VI
discusses the findings and implications for accounting research.
2.
Background and Hypotheses Development
Motivated Reasoning
Kunda’s (1990) motivated reasoning theory posits that in situations where there is subjectivity
or ambiguity in interpreting underlying information, individuals can make biased information
processing if they have a self-interested directional goal. However, individuals also have accuracy goals to achieve the most appropriate judgment, and accuracy goals dominate directional
goals when justifications for a preferred directional conclusion cannot be made. Auditing contexts often contain evidence or professional standards that contain ambiguity, and auditors have
been found to engage in motivated reasoning (Hackenbrack & Nelson, 1996; Kadous et al., 2003;
Blay, 2005; Koch & Salterio, 2017).
Audit Partner Roles and Performance Evaluation
Multiple partners take on different roles over the course of an audit engagement. Contact partners
establish primary contact and communicate with prospective clients, and to solicit inputs for
further evaluation before the firm submits a bid to win the client’s business. Big 4 partners that
we interviewed note that a contact partner often goes on to become the engagement partner
for the client as clients perceive that the contact partner has greater familiarity with and deeper
knowledge of the client. When the client appoints a firm as the auditor, the firm will assign an
engagement partner to the client, who, depending on workloads, schedules, industry expertise,
and conflict of interest concerns may or may not be the contact partner. The engagement partner
oversees the entire engagement and is responsible for the audit opinion and other conclusions
arrived at in the engagement. Finally, auditing standards (AS 1220) and quality control standards
(ISQC 1, ISQM 2) require that audit firms appoint EQR partners to review any judgments made
and conclusions arrived at by the audit team, including those of the engagement partner. EQR
partners act as a last line of defense for the audit firm.
Does Client Acquisition Impair the Objectivity of Engagement Partners
175
Audit partners’ performance is evaluated largely based on two criteria, audit quality and
engagement profitability and the relative weight given to each criterion varies depending on their
roles (Lennox et al., 2020). Lennox et al. (2020) report the criteria used to evaluate engagement
partners and EQR partners in a large audit firm in China. They find that engagement partners’
performance is largely evaluated on both audit quality and engagement profitability, while EQR
partners’ performance is evaluated on audit quality. These evaluation criteria likely shape the
goals that audit partners adopt in their engagements—having both an accuracy goal of upholding
audit quality and a directional goal of acquiescing to the client’s preferences within professional
means in the role of an engagement partner, 3 and a more dominant accuracy goal of upholding
audit quality in the role of an EQR partner. A contact partner role is not one formally designated
within the audit firm, unlike that of the engagement partner and the EQR partner, which are roles
formalized within the audit firm and by auditing standards. Rather, a partner is deemed a contact partner if he or she brings in a client to the firm. Our interviews with senior audit partners
(see Section 3) indicate that engagement partners who are also contact partners are not evaluated
differently.
Extant archival literature on audit partners’ performance evaluation does not make a distinction between the revenue generated by an engagement partner who is also the contact partner and
the revenue generated by an engagement partner who is not (e.g. Knechel et al., 2013; Coram
& Robinson, 2017; Lennox et al., 2020). Thus, this line of research does not inform us about
whether the difference in performance evaluation criteria between engagement partners who
are also contact partners and engagement partners who are not, if any, would lead to different
audit judgments. A large stream of literature examines engagement partner decision making (e.g.
Trompeter, 1994; Bedard & Johnstone, 2004; Wang & Tuttle, 2009; Koch & Salterio, 2017). A
separate stream of literature examines the roles that contact partners play in securing clients for
the firm (e.g. Ayers & Kaplan, 2003; Fiolleau et al., 2013). There is also some limited research
on the role of EQR partners (see Schneider & Messier, 2007 for a review), with a significant
portion of extant studies using participants that do not perform engagement quality reviews (e.g.
students or audit seniors). In the next section, we provide theory on why audit partners serving
the dual role as contact partner and engagement partner would bias their judgment toward the
client’s preference.
Dual Role as Contact Partner and Engagement Partner
To-date, there has been no investigation of how playing both the roles of contact partner and
engagement partner can influence the engagement partner’s judgments. As discussed below, we
posit that this dual role will induce a stronger directional goal of keeping a client, relative to
an engagement partner who is not the contact partner. First, the effort expended in acquiring
a client may induce in the dual-role engagement partner a sense of psychological ownership
(Van Dyne & Pierce, 2004), and an associated self-interested directional goal to keep the client.
Second, the close rapport in the contact and acquisition process induces within the dual-role
engagement partner an affinity for the client, leading to audit judgments that are biased toward
the client’s preference, to the extent that these judgments are justifiable and within the reasonableness constraint (Koch & Salterio, 2017). Finally, the dual-role engagement partner may have
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.
176 I. Chan et al.
higher motivation to retain the client to the extent that losing a client damages his or her selfperception of being an achiever (see Kunda 1990, who discusses how a self-interested directional
goal may arise from the inconsistency with the decision-maker’s self-perception).
This prediction is not without tension, as contact partners who go on to become engagement partners are likely to have both directional and accuracy goals (Kunda, 1990). Auditors’
directional goal motivates them to make judgments that are consistent with their directional
preference. However, engagement partners broadly play the role of a reviewer as they assess the
inputs and preliminary judgments made by the audit team, and extant audit research suggests
that auditors in the role of a reviewer may be more skeptical when attending to inconsistencies
(Libby & Trotman, 1993). Audit partners also suffer penalties for lower audit quality in the form
of reputational damage and lower performance ratings (Knechel et al., 2013; Bouwens et al.,
2019), which may activate accuracy goals. Notwithstanding the presence of some accuracy goal,
our theory predicts an incremental effect of the directional goal adopted by a dual-role partner,
and we formalize our hypothesis as follows:
H1: Engagement partners will make judgments that are more biased towards the client’s preferences when they are
contact partners than when they are not contact partners.
The Role of Contact Partners in EQR Partners’ Decisions
Beyond understanding how playing the role of contact partner influences judgments made by
engagement partners, it is also important to understand how the dual role of engagement partners being contact partners can influence the judgments made by EQR partners. Also, none of
previous studies investigate whether audit partners’ dual role as contact and engagement partner
influences the EQR partners’ judgments. We next examine how the judgments of EQR partners
can be influenced when they are aware that the engagement partner of the client also plays the
role of contact partner. We expect that EQR partners are likely to be cognizant of their quality
control role and recognize that they are subject to regulatory scrutiny and sanctions (Messier
et al., 2010), and therefore have a greater degree of objectivity.
Auditing and quality control standards (AS 1220, ISQC 1, ISQM 2) require EQR partners to
remain independent and objective when reviewing the work of the engagement team. To ensure
the compliance of auditing standards, PCAOB performs inspections on audit firms that cover
audit judgments by engagement partners and EQR partners (Messier et al., 2010; Kraussman &
Messier, 2015; Dowling et al., 2018). Moreover, the SEC and PCAOB administer enforcement
sanctions against EQR partners in case of GAAP and GAAS violations. As reported in Messier
et al. (2010), in half of the sanctioned cases in their study, the involved EQR partners are denied
the privilege of practicing before the SEC or PCAOB for three or more years. Kraussman and
Messier (2015) subsequently find an additional 16 administrative sanctions against EQR partners
since 2009. Further, unlike engagement partners who are in part compensated by the number of
audit engagements (Knechel et al., 2013), EQR partners are not involved in the audit engagement and have lower motivation to be biased toward the client’s position, leading them to be
more independent when they review the work of the engagement team. Consistent with this
view, Lennox et al. (2020) find that while engagement profitability is important for engagement
partners, it is less so for EQR partners. In addition, they find that audit quality is very important for EQR partners but not the only consideration for engagement partners. The differential
concerns over audit quality and engagement profitability between EQR partners and engagement
partners are manifested by the positive association between partners’ equity ownership and audit
quality for EQR partners, but no clear association for engagement partners.
Early studies support the notion that EQR partners are generally unbiased. Ayers and Kaplan
(2003) use a client acceptance setting and design a case where the potential client has moderate
Does Client Acquisition Impair the Objectivity of Engagement Partners
177
risks (i.e. has some negative and positive risk aspects). The manipulation involves having the
contact partner describe the potential client as either having low risk (which is inconsistent with
the factual depiction) or about the same risk as a normal client. They find that review partners’
risk assessments of potential new clients are unaffected by the contact partners’ risk assessments; in fact, their client acceptance judgments adjust for possible over-optimism in the contact
partners’ risk assessments. Schneider, Church, and Ramsay (2003) use a bad debt allowance setting and find that EQR partners that were involved in planning the audit were just as likely to
agree with the engagement team’s conclusions as EQR partners that were not, suggesting that
EQR partners are less susceptible to bias. Neither of these papers examine if the EQR partners’
judgments are influenced by the engagement partner being the contact partner as well.
Consistent with the theory of motivated reasoning, we expect that EQR partners are unlikely
to develop a directional goal to consider the engagement partners’ motivation while making their
own judgments. Hence, their accuracy goal stemming from their role as the last reviewer in the
quality control chain are likely to be salient. In this scenario, EQR partners will be unaffected
by whether the engagement partner is also the contact partner, and therefore less likely to make
biased judgments. This suggests that EQR partners will not, for instance, make upwardly-biased
judgments in favor of the client when the engagement partner is also the contact partner versus
when the engagement partner is not the contact partner. Adoption of an objective perspective
also suggests that EQR partners are unlikely to make downwardly-biased judgments when the
engagement partner is also the contact partner to pre-empt upward bias in the engagement partner’s judgments; any downwardly- or upwardly-biased judgments are, by nature, non-neutral.
Hence, this leads us to our second hypothesis.
H2: Engagement partners’ dual role as contact partner will have no effect on EQR partners’ judgments about
engagement partners’ work.
Two studies conclude that EQR partners can also be susceptible to biases, although these conclusions may be premature. Favere-Marchesi and Emby (2005) find that EQR partners who were
reminded that they had agreed with the client’s position on goodwill valuation in the prior year
are more likely to agree with the same position in the current year, compared to a new EQR
partner who did not receive such a reminder. The case scenario in which the EQR partner is not
informed about the engagement partner’s decision regarding the goodwill valuation in the current
year, making it unclear as to whether EQR partner judgments can be influenced by the decisions
made by engagement partners. Tucker and Matsumura (1997) use students as participants in an
experiment in an abstract lab setting and find that EQR partners will report in a biased manner
favoring engagement partners despite incentive schemes that should promote unbiased reporting. However, we find that the features of the experimental design leave it an open question as to
whether EQR partners are indeed susceptible to biases despite their prominent role. For example,
the audit firms’ ultimate decisions had equal probability of being a clean or qualified opinion if
the EQR partner disagreed with the engagement partner, instead of siding with the EQR partner.
Aversion to uncertainty may have led EQR partners to simply agree with the engagement partner
instead.
The discussion leading to H2 predicts EQR partner objectivity in a situation where the EQR
partner only holds an accuracy goal, as intended by auditing and quality control standards. Auditing and quality control standards require that the EQR partners be independent of the client, but
they do not require clear segregation between the audit team and the EQR partner. Hence, situations may arise where the EQR partners can develop self-interested directional goals to acquiesce
to the engagement partner’s desire to favor the client. An instance of this would be where the
engagement partner is also a member of the audit firm’s management team. An audit firm’s management team is usually made up of more experienced partners with most serving as managing
178 I. Chan et al.
partner of the firm, function heads, and representatives from branch offices.4 As the management
team oversees policy making and major decisions within the firm, career concerns may motivate
the EQR partner to agree with the engagement partner’s conclusions.5 As such, when an EQR
partner is aware that he or she is reviewing the work of the engagement partner who is the contact
partner and a management team member, he or she may think it better for his or her own interest to acquiesce to the reviewee engagement partner. Hence, the EQR partner may be inclined
to favor the client to the extent that he or she perceives the engagement partner/contact partner
would also like to favor the client.
There is tension in this prediction because theory and our earlier predictions indicate that EQR
partners, because of their separation from the client and the quality control role they play, can
override any tendencies to favor the client. Nonetheless, motivated reasoning theory suggests
that people may hold both an accuracy goal and a directional goal, and when the accuracy goal is
paired with the directional goal, the accuracy goal may amplify the biased judgments towards the
conclusion consistent with the directional goal. This is because to be able to satisfy the accuracy
goal, ‘more extensive processing caused by accuracy goals may facilitate the construction of
justifications for desired conclusions’ (Kunda, 1990: 487). In auditing, Kadous et al. (2003)
examine whether the requirement of quality assessment on different accounting methods about
revenue recognition amplifies or mitigates the biased judgment arising from directional goal
commitment. They find that quality assessment (presumably to create an accuracy goal) amplifies
the biased judgment arising from directional goal commitment (directional goal). This is because
assessing which method is most appropriate may also be influenced by the directional goal when
there is no clear benchmark. Thus, auditors hold an illusion of objectivity by the construction
of justification for the client preferred method. In our setting, EQR partners hold an accuracy
goal, but out of their self-interest, they also have a directional goal. The literature suggests that
the directional goal will bias EQR partners to acquiesce to the judgment of engagement partners
who are management team members. Further, given the prediction in H2 that EQR partners’
judgments will not be influenced by whether the engagement partners are contact partners, we
expect that when reviewing the work by the engagement partners who are contact partners and
also management team members, compared to when reviewing the work of the engagement
partners who are contact partners but not management team members, EQR partners’ directional
goal to please the engagement partners will bias EQR partners towards the judgments made by
the engagement partners. Accordingly, we state the following hypothesis:
H3: EQR partners will make judgments more in line with the engagement partners’ position when they review the
work of engagement partners who are contact partners and also management team members than when they review
the work of engagement partners who are contact partners but not management team members.
4 While an audit firm’s management team is usually made up of more experienced partners with most serving var-
ious 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.
Does Client Acquisition Impair the Objectivity of Engagement Partners
3.
179
Interview Evidence
To find out more about institutional features related to contact partners, we interviewed two
groups of senior partners from the participating firms. In the first set of interviews, we asked
three senior audit partners from Big 4 firms about how contact partners become engagement partners, and how frequently this happens. Interviewees indicate that contact partners often become
engagement partners and that this occurs because clients have a preference to be served by the
partner that they initially contacted. Such a preference arises primarily because clients believe
that contact partners are more familiar with clients and thus clients build trust in the contact
partners.
In the second set of interviews, we spoke to two senior partners. We asked the partners four
primary questions. The first question related to how often contact partners become engagement
partners, and in cases where they do not become engagement partners whether they will be
assigned as a relationship partner for the engagement. Our interviewees indicated that contact
partners often become engagement partners for the clients because of the contact partners’ greater
familiarity with and understanding about the client. They estimated the percentage to be about
80%. In cases where the contact partner does not become the engagement partner, audit firms
may assign the contact partner as a relationship partner if the client is an important one.
The second question related to factors that determine whether the contact partner becomes the
engagement partner of the newly acquired client. Interviewees indicated that the contact partner
will not become the engagement partner when the contact partner’s workload already meets
the work hour limit prescribed by the firm, or when there is a conflict in the contact partner’s
schedule. Industry expertise (e.g. clients in the financial and banking industry) is another factor.
Also, the contact partner will not become the engagement partner when there is a concern about
potential conflict of interest.
The third question related to how audit partners are evaluated and compensated, and whether
they are evaluated and compensated differently when engagement partners are also contact partners. While the specific form of performance evaluation and compensation varies with the firm,
the criteria of performance evaluation include revenues from serving the clients (i.e. engagement
partners), audit quality, and other factors such as leadership or public service. With respect to
revenues from serving as engagement partners, there is no difference in terms of how revenues
are weighted in performance evaluation whether they are also contact partners or not.
The final question related to whether they perceive a difference in engagement partners’ motivation to retain the current clients by lowering income-decreasing audit adjustments as a function
of whether the clients were obtained through their initial contact. When asked, interviewee partners indicated that engagement partners would not make different audit adjustments whether
they are also contact partners or not. We further asked under what circumstances a difference
may arise. They mentioned a scenario in which the engagement partner has built strong social
bonds with the client during the initial contact process such that the engagement partner may
hesitate to make a large audit adjustment. Both interviewee partners emphasized that the audit
judgment should be justifiable to EQR partners and that the risk involved in making the decision
should be kept in mind.
In sum, the interview finding about audit partners’ performance evaluation and compensation
is largely consistent with prior research (e.g. Knechel et al., 2013; Lennox et al., 2020). The
finding also suggests that, consistent with motivated reasoning theory (Kunda, 1990) and audit
research (e.g. Kadous et al., 2003; Koch & Salterio, 2017), when the risk is not high and the
biased judgment is justifiable, self-interested directional goal may bias the engagement partner
who is also the contact partner more to make an audit adjustment judgment that is in line with
the client’s preference.
180 I. Chan et al.
4.
Experiment 1
We test Hypothesis 1 using a 2 × 1 between-participants experimental design. We manipulate whether the engagement partners have a dual role as contact partner or not. We term
the conditions the contact partner condition and the not contact partner condition. In both
conditions, the participants have been the engagement partner since the day their firm secured
the client. The experimental task asks audit partners with experience in the roles we examine
in this study to perform a goodwill impairment task to assess if the client used an appropriate
discount rate, growth rate, and an appropriate amount of impairment loss. We choose a goodwill impairment task as the setting for the following reasons. First, both the FASB and IASB
have moved towards adopting fair value accounting, placing greater emphasis on valuation and
fair value audits. Secondly, the valuation of intangible assets is challenging for auditors as it
involves complex accounting estimates such as the selection of valuation models, estimates of
the model’s parameters, and cash flows in applying the models. Finally, the inherent subjectivity
and uncertainty in the task enables our participants to engage in motivated reasoning (Kunda,
1990).
Participants
We sent 46 copies of the experimental materials to our contacts, who are managing partners at
two Big Four audit firms in Taiwan.6,7 Participants completed the study in Mandarin. We translated and back-translated the instrument from English to Mandarin to ensure that the meaning
was consistent in either language. To ensure a high response rate, we first obtained the agreement
of the managing partner of each firm to provide partners as participants in the study. The managing partner of each firm arranged for the distribution of the instruments, and we received 45
completed instruments. We omitted the responses of three participants as they had many missing
values relating to the main dependent variables (decision on the impairment loss, discount rate,
growth rate, and their upper and lower bounds), and another three who provided responses that
were outliers (more than 3 standard deviations from the means). We also excluded the responses
of two participants who fail the manipulation check as appropriately recognizing the role of the
contact partner is crucial to our test of hypotheses. The manipulation check requires participants
to indicate if they are the contact partner or not. Inferences from our results are unchanged when
we include the manipulation check failures. The low failure rate suggests that the manipulation
was effective. The final sample includes 15 (22) partners from Firm 1 (2) with 7 (10) partners in
the contact partner condition and 8 (12) partners in the not contact partner condition.
On average, participants had 22.2 years of audit experience, with 11.3 years of experience as
audit partners. About 35 percent of them were females, and 67.6 percent of them had a master’s
degree, with the remaining holding a bachelor’s degree. We asked participants to provide their
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.
Does Client Acquisition Impair the Objectivity of Engagement Partners
181
experience with the below questions for the last three years. On average, each participant served
as the engagement partner for a total of 61 audit engagements, as EQR partner for a total of 14
engagements, and as contact partners for a total of nine clients (i.e. the audit firms secured the
client through their contact). In 84 percent of cases where participants served as contact partners,
they went on to serve as engagement partners for the client, and in one percent of cases, went
on to serve as EQR partner for the client. Seventy-four percent of participants have served in all
three roles (contact partner, engagement partner, and EQR partner) over the last three years. In
terms of participants who have served only two roles, 3 percent of participants have only served
as contact partners and EQR partners, 16 percent of participants have only served as engagement
partners and contact partners, and 8 percent of participants have only served as engagement
partners and EQR partners. None of the participants served only one role over the last three
years. None of the demographic information differs significantly across conditions, and there
are no significant interactions with our independent variable (all p > 0.17) except for gender,
which has a marginally significant interaction (p = 0.078). This pattern holds after adding audit
firm as another independent variable, which does not significantly interact with our manipulation
(p > 0.57). Adding gender or firm as covariates or interaction variables do not alter inferences
from our results.
Procedures and Variables
At the start of the experiment, participants were told that the management of JGI International
agreed to select their firm as the auditor to provide financial statements assurance for JGI International, and were asked to take on the role of engagement partner on the audit of JGI International.8
They were given engagement information, background information of the client, and financial
data of the client. Their task was to review the available information, along with the work done
by the audit team, to decide the appropriate amount of goodwill impairment for the client. Participants in the not contact partner (contact partner) condition were informed that a fellow partner
(they) had spent time contacting JGI International before the latter selected their audit firm as
JGI’s audit client, despite competition from two other Big 4 audit firms. Because effort and
involvement during the client contact process cannot be readily simulated in the experiment, we
reinforce the felt time and effort needed by asking participants in the contact partner condition
to indicate the amount of time and effort needed to secure an equivalent client, and the extent
securing this client was considered an achievement.9
Participants read a case relating to JGI International’s investment in a subsidiary. Participants
in both conditions read that JGI International had invested in a subsidiary, ABC Company, and
recorded $100 million of goodwill on the investment. None of the goodwill related to the investment had been impaired. In the current year, the audit team performed work on the goodwill
impairment and that the audit manager assessed that JGI International should impair goodwill
relating to the investment in ABC Company by $60 million, with a range of $10 million – $70
8 Like the practice in the U.S., audit committees in Taiwan make auditor selection and retention as well as audit fee deci-
sions. 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.
182 I. Chan et al.
Table 1. Impairment Loss Judgments of Engagement Partners: Test for H1
Panel A: Descriptive Statistics: Means, (Standard Deviation), Number of Observationsa
Dual Roleb
Contact Partner
(dual role)
[A]
Impairment
Loss Judgments
Lower Bound of
Discount Rate
44.12
(8.15)
n = 17
5.88
(1.59)
n = 16c
Mean Difference
Not Contact Partner
(no dual role)
[B]
Impairment
Loss Judgments
Lower Bound of
Discount Rate
50.00
(12.57)
n = 20
6.60
(1.63)
n = 20
td
df
p-value
33
0.048
Panel B: Independent Samples T-Test for Engagement Partner Judgments
Cell A vs Cell B
5.882
− 1.713
a Impairment loss judgments: participants’ responses to the question ‘indicate your decision on the goodwill impairment
loss that JGI should ultimately recognize’, with a minimum of $10 million and a maximum of $70 million.
b Engagement partner having dual role as contact partner: In the contact partner condition, the engagement partner is also
the contact partner for the client.
c One participant in this condition did not answer this question.
d T-statistic is adjusted for non-homogeneity of variance as Levene’s test indicates that the assumption of vari-
ance homogeneity is violated (F-statistic = 6.896, p = 0.013, two-tailed). The degree of freedom is calculated using
Satterthwaite’s formula.
million. This adjustment was quantitatively and qualitatively material as it exceeded the materiality threshold and would have caused JGI International’s earnings per share (EPS) to fall short
of analysts’ forecasts.
Additionally, participants were also provided with ten pieces of evidence that related to the
operations of ABC Company, which were split equally into five pieces of positive and negative
evidence each. This evidence included information relating to inputs used by JGI International
in their discounted cash flow model. Participants were told that the discount rate used by JGI
International was slightly lower than that used by other companies in the industry, and the growth
rate used to estimate fair value was higher than that used by other companies.
After reading the case, participants indicated the appropriate amount of impairment loss, the
appropriate growth rates and discount rates, and the upper and lower bounds of the reasonable
ranges for the growth rate and discount rate.10 Next, they put this section of the case study
aside and answered a post-experimental questionnaire that included manipulation check questions relating to whether they played the role of an engagement partner or EQR partner, and
whether the engagement partner was the contact partner or not. Finally, participants also provided demographic information, and some additional information relating to their answers in the
case study.
Results
Tests of Hypothesis H1
Table 1, Panel A presents cell sizes, means, and standard deviations for estimates of goodwill
impairment loss for the two experimental conditions, and Panel B presents the results of our tests
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.
Does Client Acquisition Impair the Objectivity of Engagement Partners
183
of hypotheses. As we predict in H1, we find that participants require a lower goodwill impairment
loss when they are also the contact partner compared to when they are not the contact partner
(means = 44.12 and 50.00, respectively; t33 = − 1.713, p = 0.048, one-tailed). Mann–Whitney
test shows a similar result (Mann–Whitney U = 118, p = 0.058, one-tailed).11
Supplemental analyses
We additionally examine other related dependent variables that participants were asked to answer
to better understand how participants bias their assessments downwards. We expect that participants in the contact partner condition will systematically bias the inputs to their goodwill
impairment loss judgments. We find that engagement partners who are contact partners find a
lower minimum discount rate marginally more acceptable, compared to those who are not contact
partners (means = 5.88 and 6.60, respectively; t34 = − 1.339, p = 0.09, one-tailed), consistent
with the expectation that such engagement partners may try to lower goodwill impairment loss
judgments by valuing assets higher through a lower discount rate.12 Taken together, our results
provide some evidence that being a contact partner for the client tends to make the engagement
partner more biased towards the preferences of the client—impairment losses are lower, and so
are the lower limits of the discount rates.
5.
Experiment 2
Procedures and Participants
We conduct a second experiment using the same case as in our first experiment to test H2 and
H3. We use a 3 × 1 experimental design where participants are informed that they are the EQR
partners on the audit engagement. We manipulate whether the engagement partner is the contact
partner or not, and have an additional condition where participants are informed that the engagement partner is the contact partner as well as a member of the audit firm’s management team. In
the experiment, we used the term that each firm adopted. To simplify and keep the anonymity of
the participating firms, we use the term ‘management team’ here. Unlike Experiment 1, participants in all conditions in Experiment 2 are informed that the engagement partner has decided to
recognize $40 million of impairment losses, resulting in the company’s EPS being reduced by
$0.20. The amount of $40 million is chosen as it is the midpoint of the range of $10 million to $70
million proposed by the engagement team, thus representing a neutral stance. We term the conditions contact partner condition, not contact partner condition, and contact partner (conflicted)
condition. We follow the same procedures as in Experiment 1.
We collected 59 responses from audit partners in the same audit firms that we approached in
Experiment 1. We exclude two responses that were outliers (more than 3 standard deviations
from the means) and exclude a further two responses that failed the manipulation checks. This
resulted in 55 usable responses, including 25 (30) partners from Firm 1 (2) with 8 (8) partners
in the contact partner condition, 9 (12) partners in the not contact partner condition, and 8 (10)
in the contact partner (conflicted) condition. Inferences from our results are unchanged when
we include the manipulation check failures. The demographic information of the participants is
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).
184 I. Chan et al.
Table 2. Impairment Loss Judgments of EQR partners: Tests for H2 and H3
Panel A: Descriptive Statistics: Means, (Standard Deviation), Number of Observationsa
Engagement Partner Role
Engagement Partner
is Contact Partner
Impairment Loss Judgments
50.31
(9.39)
n = 16
[A]
Engagement Partner is Contact
Partner and Management Team
Member
Engagement Partner is
Not Contact Partner
Impairment Loss Judgments
50.00
(11.94)
n = 21
[B]
Mean Difference
Impairment Loss Judgments
43.89
(6.98)
n = 18
[C]
tb
df
p-value
0.089
2.241
35
27
0.924
0.017
Panel B: Simple Contrasts for EQR Partner Judgments
Cell A vs Cell B (H2)
Cell A vs Cell C (H3)
0.313
6.424
a Impairment loss judgments: participants’ response to the question ‘indicate your decision on the goodwill impairment
loss that JGI should ultimately recognize’, with a minimum of $10 million and a maximum of $70 million.
b Both t-statistics are adjusted for non-homogeneity of variance as Levene’s test indicates that the assumption of variance
homogeneity is violated (F-statistic = 3.860, p = 0.057 for H2; F-statistic = 5.111, p = 0.031 for H3). Degrees of
freedom are calculated using Satterthwaite’s formula.
similar to those in Experiment 1. On average, participants had 23.1 years of audit experience,
with 10.4 years of experience as audit partners. About 44 percent of them were females, and 77.8
percent of them had a master’s degree, with the remaining holding a bachelor’s degree.13 Over
the past three years, each participant, on average, served as engagement partner for a total of 64
audit engagements, as EQR partner for a total of 18 engagements and as contact partners for a
total of eight clients (i.e. the audit firms secured the client through their contact). They served
as engagement partners for 89 percent of the clients that they had served as contact partners,
and as EQR partner for one percent of the clients that they had served as contact partners. 76
percent of participants have served in all three roles (contact partner, engagement partner, and
EQR partner) over the last three years. In terms of participants who have served only two roles,
13 percent of participants have only served as engagement partner and contact partner, and 11
percent of participants have only served as engagement partner and EQR partner. None of the
participants served in only one role over the last three years. Similar to Experiment 1, we find no
significant interactions between any of the demographic variables and the independent variable
(all p > 0.35).
Results
Tests of Hypothesis H2
Table 2, Panel A presents cell sizes, means, and standard deviations for estimates of goodwill
impairment loss for the three experimental conditions. Panel B presents the results of our tests
of hypotheses. As Experiment 2 utilizes a 3 × 1 experimental design, we use simple contrasts
to increase the power of the analysis as well as to include the degrees of freedom for all cells by
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.
Does Client Acquisition Impair the Objectivity of Engagement Partners
185
pooling the error variance from all three conditions. H2 predicts that EQR partners make similar
impairment loss judgments whether or not the engagement partner is the contact partner. Consistent with H2, we find no significant difference in the amount of impairment loss adjustment
by participants in their role as EQR partner regardless of whether the engagement partner had
been a contact partner or not (means = 50.31 vs. 50.00, respectively; t35 = − 0.089, p = 0.924).
Mann–Whitney test shows a similar result (Mann–Whitney U = 159, p = 0.797).
As H2 predicts a null hypothesis, the traditional null-hypothesis significance testing approach
that we adopt enables us to conclude that we cannot accept the alternate hypothesis but does
not enable us to accept the null hypothesis. We turn to Bayesian statistics for a more robust test
of the null hypothesis. Bayesian statistics combines prior knowledge of a population parameter
(e.g. that a population mean is equal to zero) with data collected in the experiment to develop
revised distributions of the parameter that enables researchers to explicitly test and accept null
hypotheses (Kruschke, 2010, 2015). To test H2, we use two approaches – the parameter estimation and model comparison approaches. These techniques provide different, but complementary,
information about the posterior distribution of the parameters.
Bayesian parameter estimation.
We conduct this analysis using JASP, an open-source statistical package. The results of the
parameter estimation approach are presented in Figure 1.14 The black bar above the plot of
the posterior distribution indicates the 95% confidence interval that the parameter estimate is
likely to be in. Values in this region are also regarded as more credible than any point outside
this region (Gelman et al., 2013; Kruschke, 2015). As can be seen in the figure, zero is squarely
within the 95% confidence interval, suggesting that zero is a highly credible value for the mean
difference of EQR partners’ judgments when the engagement partner is not the contact partner
compared to when the engagement partner is the contact partner. Further, the probability that the
mean difference is zero in the posterior distribution is highest when the estimate is zero.
Bayesian model comparison
While parameter estimation techniques enable us to make inferences about the likelihood of a
parameter estimate, Bayesian model comparison approaches allow us to assess the credibility of
a model supporting the null hypothesis against one supporting an alternate hypothesis (Krushke,
2015). The Bayes Factor for our comparison (BF10 ), as seen in Figure 1, is approximately 3.111.
This suggests that our observations are three times as likely to occur under the null hypothesis
than an alternate specification. A Bayes Factor of this magnitude provides moderate evidence
that H0 is supported (Lee & Wagenmakers, 2013). Taken together, the two approaches provide
support for H2.
Tests for hypothesis H3
H3 predicts that EQR partners will make judgments more in line with the engagement partners’
position when they review the work of engagement partners who are contact partners and also
management team members than when they review the work of engagement partners who are
contact partners but not management team members. As expected, we find that the mean impairment loss judgments of participants in the contact partner (conflicted) condition (mean = 43.89)
are lower than those of participants in the contact partner condition (mean = 50.31, t27 = 2.241,
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).
186 I. Chan et al.
Figure 1. Bayesian Statistical Analysis of H2.
Note: As H2 predicts a null hypothesis, the traditional null-hypothesis significance testing approach that we adopt enables
us to conclude that we cannot accept the alternate hypothesis, but does not enable us to accept the null hypothesis. We
turn to Bayesian statistics for a more robust test of the null hypothesis. Figure 1 reports the results of applying two
techniques: Bayesian parameter estimation, and Bayesian model comparison.
p = 0.017, one-tailed).15 Mann–Whitney test shows a similar result (Mann–Whitney U = 88,
p = 0.028, one-tailed).
6.
Conclusion
We experimentally investigate, using experienced audit partners as participants, whether engagement partners’ involvement in the client acquisition process as the contact partner can influence
their subsequent audit judgments, and whether the EQR partner’s judgments are influenced when
he or she is aware that engagement partners play both roles. We find that engagement partners
who also play the role of contact partners are more likely to favor a client’s position in making
judgments during the audit and assess a lower goodwill impairment loss, compared to engagement partners who are not contact partners. Our results show that involvement in the client
acquisition process as contact partners can cause engagement partners to make biased judgments. We also examine how EQR partners’ judgments are influenced when they are aware that
the engagement partners play the role of contact partners. We find that EQR partners are unaffected by this awareness. However, EQR partners’ judgments are also biased when they act out
of self-interest to acquiesce to the engagement partner’s desire to favor the client.
Our study extends the auditing literature on the client acceptance process. Prior research has
focused exclusively on determinants of the audit firm’s acceptance decision, but not the impact of
the client acquisition process on the subsequent audit process. We fill in the void in the literature
by providing a theoretical account and evidence on how audit partners’ initial involvement in the
client acquisition process can have an adverse impact on their objectivity subsequently should
they become an engagement partner of this client that they initially contacted.
We also contribute to the literature on the quality-control function served by audit engagement
partners (e.g. Ricchiute, 1999; Schneider & Messier, 2007). Standard setters and research in
the audit review process generally considers engagement partners, who are typically the last
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).
Does Client Acquisition Impair the Objectivity of Engagement Partners
187
senior person in the engagement team to review the engagement file, as key audit personnel
who ensure the quality of the audit. We posit and show that there are circumstances that inhibit
the engagement partner’s objectivity stemming from an endemic aspect of the client acquisition
process. Our study also contributes to the literature on the quality-control function served by
EQR partners, who are often the last senior person within the audit firm to review the engagement
file. We provide evidence on the conditions under which the judgments of EQR partners are (are
not) biased.
Our study has important implications for standard setters, regulators, and auditors. Consistent
with the audit firms’ concerns (see PricewaterhouseCoopers, 2011; Stringer, 2011), our results
suggest there may be a possible downside to mandatory audit firm rotation—to the extent that
auditor rotation leads to firms having to go through the client acquisition process more often,
there can arise circumstances where this process can also result in impaired judgments when
engagement partners are personally involved in client acquisition. More research is needed to
examine if other factors involved in mandatory audit firm rotation may also similarly negate any
improvements to audit quality before it is implemented.
To examine the effects of EQR partners’ self-interested directional goal on their objectivity,
we use a setting where the engagement partner is a member of the management team in the firm.
Future research may consider other settings including the following: the EQR partner has close
social bonds with the engagement partner, is under pressure from the management team to sign
off on the review in order to deliver the audit on time, or is familiar with the audit team and the
client due to being an engagement partner on the client previously. Regulators and audit firms
may consider reducing instances where EQR partners are motivated to bias their judgments by
implementing stricter independence rules between EQR partners and the engagement team or
reducing the number of engagements that senior management partners are on.
Despite these implications, this study is subject to potential limitations, which may provide
opportunities for future research. We manipulate the dominance of the auditor’s directional goal
based on whether the engagement partners are contact partners or not. This limits us to observing
the effects of directional goal at two levels: very dominant (contact partner) or very weak (not
contact partner), whereas in reality, such differences may vary along a spectrum. Future research
can examine such motivations at different levels to determine how this may influence the judgments of engagement partners. In a similar vein, we only ask participants in the contact partner
condition to answer questions about the time and effort they would spend to secure an equivalent
client. One might argue that asking the contact partner participants these questions may make
them associate the effort in the client acquisition process with client importance and potentially
make the effect of contact partner manipulation less clear. Readers are reminded of the possible
trade-offs for this design choice (see footnote 10). Second, while separation of contact partner
from engagement partner is not common in practice, inclusion of this scenario in a study to test
hypotheses is a strength of experimental research. Nonetheless, since contact partners do not subsequently become engagement partners due to their workload, work schedule, industry expertise
or the concern of potential conflict of interest, participants who are randomly assigned to the
not contact partner condition may infer that their workload, work schedule, industry expertise
or independence can afford them to perform a more appropriate judgment, leading them to have
an accuracy goal and assess a greater impairment loss. This is in contrast to the participants
in the contact partner condition who would have a self-interested directional goal and assess
a smaller impairment loss. Our data does not provide evidence to support or refute this possible inference. Aside from this, our study provides some evidence that the engagement partner’s
role as a contact partner can influence his or her judgments, but do not examine factors that can
exacerbate or attenuate this effect. Future research can examine if factors such as partners’ professional identification (Bamber & Iyer, 2007) may constrain such behavior. Our participants are
188 I. Chan et al.
from Big 4 audit firms in Taiwan. While we do note that our results are theory consistent and
Big 4 firms have the similar firm policies and practice codes worldwide, we encourage future
research to test the generalizability of the theoretical propositions here across international settings. Finally, our experimental setting does not allow EQR partners to interact with engagement
partners during the review process. In practice, EQR partners and engagement partners will often
negotiate any differences in judgments, which may result in engagement partners being able to
convince EQR partners to acquiesce to their positions, and therefore reducing the effectiveness of
EQR partners. Future research can examine how such interactions may influence EQR partners’
judgments.
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).
Funding
This work was supported by Singapore Ministry of Education Tier 2: [Grant Number MOE2019-T2-2-137] and United
Overseas Bank Endowed Chair.
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