Conventional wisdom suggests that audit engagement partner name disclosure benefits investors by informing them about the partners' performance. However, such public disclosure of the identity of the audit partners may also intensify competition for audit talent in the labor market. To examine the economic consequences of audit partner identification, we build a two‐period model in which an audit firm matches partners to clients. The audit partner identification broadens a partner's outside options in the labor market, making talent retention more costly. If the talent‐retention cost is substantial, audit partner identification may cause an audit firm to adjust its partners' compensation packages and mismatch the partners and clients, which may lead to lower audit quality. Overall, we identify unintended consequences of audit partner identification by examining its impact on the audit labor market, and we provide economic reasons for the mixed empirical findings.

This paper derives the impacts of legal system characteristics and auditing standards on auditor behavior (audit quality), and analyzes the determination of optimal auditing standards under different legal regimes. Legal regimes are characterized by differences in the uncertainty concerning the outcome of legal proceedings (termed vagueness of legal systems) and differences in the average size of damage awards. Auditing standards as determined by standard setters can vary in both toughness and vagueness. Our analysis provides implications for the adoption of International Standards on Auditing ( ISA ). Countries, such as the United States, where auditor legal liability is significantly more onerous than the global norm are not likely to adopt ISA , since these standards may not induce auditors to provide the optimal level of audit quality. Conversely, the adoption of ISA by countries, such as China, where the legal system makes the recovery of damages from auditors quite difficult, is not by itself likely to result in a high level of audit quality. Furthermore, our model suggests that auditor rotation can help improve audit quality, but only in certain circumstances.

This paper hypothesizes and finds that firms audited by city‐industry specialists have more timely disclosures of contingent losses from litigation when there is no news coverage relating to the legal case prior to management disclosures. A closer examination reveals that this result is explained by the specialist auditors’ prior experience auditing clients in the same office and industry who are involved with litigation. In our setting, disclosures of litigation‐related contingent losses, we identify two kinds of knowledge generated from experience: industry knowledge and litigation knowledge. Industry knowledge helps auditors detect and correct poor implementation of guidance for litigation loss contingency disclosures. Auditors gain litigation knowledge from auditing clients in a given office and industry with previous involvement as defendants. Thus, the two types of knowledge interact in their effects on reporting outcomes.

We develop a measure to capture an audit firm's competitive position in a local audit market based on the transaction costs of changing audit firms included in DeAngelo's (1981) multi-period audit pricing model. Our competition measure reflects the size difference between the largest audit firm in a market specified by client industry at the city level and the other audit firms operating in that market. We find that audit fees of a client decrease as this size difference increases. This result suggests that smaller audit firms charge lower audit fees because of their competitive disadvantage to the local largest firm.

Conventional wisdom holds that joint audits would improve audit quality by enhancing audit evidence precision because “Two heads are better than one.” Our paper challenges this wisdom. We show that joint audits by one big firm and one small firm may impair audit quality, because, in that situation, joint audits induce a free‐riding problem between audit firms and reduce audit evidence precision. We further derive a set of empirically testable predictions comparing audit evidence precision and audit fees under joint and single audits. This paper, the first theoretical study of joint audits, contributes to a better understanding of the economic consequences of joint audits on audit quality.

Technological advances are reshaping the business landscape, yet their use in financial reporting has been slow. We develop a model in which auditors and companies make technology investment decisions and examine their impact on audit fees and outcomes. Our analysis shows that auditors and companies may fail to invest in mutually beneficial technology that would enhance audit quality, resulting in coordination failure. We also demonstrate how legal liability, client business risk, and auditor pricing power affect the conditions under which such coordination failure occurs. Furthermore, technology investments can either increase or decrease audit fees. When companies can choose among projects with varying risk levels, technology investments can increase audit failure risk while improving welfare by enabling them to pursue riskier but more profitable projects. Our results provide a rationale for regulatory intervention to facilitate technology investments in the financial reporting environment and offer empirical predictions.