Brandon Gipper (Stanford university) & Matthew Bloomfield (The Wharton School of the University of Pennsylvania)

Accounting and Management Control

Speaker: Brandon Gipper (Stanford university) & Matthew Bloomfield (The Wharton School of the University of Pennsylvania)    

Room T004

From 11:00 to 12:30, professor Brandon Gipper from Stanford University,

Zoom link: https://hec-fr.zoom.us/j/94854246881

Determinants and Career Consequences of Early Audit Partner Rotations

Abstract: 

We examine how often and why some audit partners rotate off client engagements before the end of the maximum five-year cycle period. Specifically, we investigate whether audit quality issues play a role for engagement partners and clients to separate prematurely. For a sample of about 4,000 within-audit firm partner rotations for Big 6 clients over the 2008 to 2014 period, we find that client characteristics such as financial leverage or performance have little explanatory power. In contrast, severe audit quality issues such as financial restatements or PCAOB inspection findings are associated with early partner rotations. These associations are more pronounced for early rotations that are not explained by scheduled retirements, promotions, or temporary leaves as well as for large clients and when partners are less experienced. We also find that female partners have a higher likelihood of early rotation for audit quality reasons. Early rotations have career consequences. Partners are assigned to fewer SEC issuer clients, manage fewer audit hours, receive lower partner ratings, and are more likely to be internally inspected after being rotated early. Our results suggest that audit quality concerns are an important factor for early partner rotations with ensuing negative career consequences for partners’ client assignments and management responsibilities. 

and

From 14:00 to 15:30, professor Matthew Bloomfield from The Wharton School University of Pennsylvania

Zoom link: https://hec-fr.zoom.us/j/96598813308 

Relative Performance Evaluation and the Peer Group Opportunity Set 

Abstract: We develop an algorithm that constructs custom peer groups for use in relative performance 

evaluation (RPE) grants, and use this algorithm to understand firms’ RPE choices. We find that firms are more likely to use RPE when our algorithm is better able to construct a peer group that closely matches the firm’s risk profile. When no such peer group can be constructed, firms are more likely to forgo RPE. Some firms choose not to use RPE in a manner consistent with optimal risk sharing (e.g., forgoing RPE despite the availability of an effective peer group or choosing to use a peer group that is less effective than an available alternative). We find that this behavior can often be explained by competitive sabotage concerns and/or rent extraction.