Audit Partner Identification, Assignment, and the Labor Market for Audit Talent

Conventional wisdom suggests that audit partner identification can benefit investors by informing them about engagement partners' performance. However, such a public disclosure requirement also allows the audit labor market to better evaluate audit partners. To examine the economic consequences of audit partner identification in the presence of the audit labor market, we build a two-period partner-client matching model in which an audit firm assigns partners to clients and partners' outside options evolve as their performance is disclosed. We show that under certain conditions, the disclosure requirement may cause a distortion in partner-client matching, because the requirement may increase some partners' outside options in the labor market, thereby increasing the audit firm's talent retention costs. The audit firm's distortion in partner-client matching due to the disclosure requirement in turn leads to lower audit quality and higher audit fees. Overall, our findings identify unintended consequences of audit partner identification by examining its impact on the audit labor market and provide economic reasons for the mixed empirical findings.