Auditor Size And Audit Quality: A Partner-Level Perspective

This study examines the effect of auditor size on audit quality at the level of audit partners. Auditor size is defined by three criteria: the wealth of the audit partners; the size of the partners\u27 client portfolios; and the number of audit partners in the firm. Using data from China, where disclosure of the identity of the engagement audit partner is required, I hypothesize and find that the personal wealth of an audit partner has two effects on audit quality: the income effect and the substitution effect. The Chinese audit market is particularly suited to study these two effects. Prior to 2010, most audit firms in China were organized in the form of limited liability corporations, in which the personal wealth of an audit partner was shielded from legal liability. In 2010, however, all audit firms in China were required to reorganize as limited liability partnerships, in which negligent audit partners had unlimited liability. I find that the wealth of an audit partner negatively affected audit quality in the period from 2007 to 2009, while in the period from 2010 to 2012 the wealth of an audit partner took an inverted-U-shape relation to audit quality. In contrast to prior studies, I examine two aspects of client portfolio size for an audit partner: the total assets of the client portfolio of an audit partner, which measure the busyness effect; and the total audit fees of an audit partner, which measure her/his total quasi-rents. I find that the total assets of the client portfolio of an audit partner has a negative association with audit quality, while the total audit fees for an audit partner are positively related to audit quality. In addition, I find that the number of audit partners in an audit firm is negatively associated with audit quality