Does Audit Partner Workload Compression Affect Audit Quality?

Posted by Wang Dong - Mar 16, 2020

By Jun Chen, Wang Dong, Hongling Han, and Nan Zhou

As the Panel on Audit Effectiveness acknowledged that time pressures lead to substandard audits, we investigate the effect of audit partner workload compression on audit quality in China. We innovate in two areas by exploiting the unique institutional features of the Chinese capital market: the mandatory auditor signature requirement enables us to calculate workloads at the audit partner level, whereas the uniform December 31 fiscal year-end presents us with an intensified setting to investigate audit partner workload compression. Specifically, we add to the accounting literature by proposing and testing a new, individual-level measure of audit partner workload compression, defined as aggregate year-end workloads of the listed company’s senior partner and proxied by total audit fees for the senior partner’s client portfolio.

We find that audit quality is inversely associated with audit partner workload compression. The negative impact of workload compression on audit quality can be mitigated by the infrastructure from Big 4, the resources from large audit firms, and the client-specific tenure of audit partners. When audit partners bear heavy workloads, their auditees are more likely to report small profits. In addition, when facing workload compression, audit partners are less likely to issue modified audit opinions and more likely to delay audit report releases. Nevertheless, they are not more likely to receive sanctions. As auditors are likely to devote more attention to high risk areas, our evidence implies that audit partner workload compression mildly impairs accrual quality but does not necessarily lead to egregious outcomes such as accounting frauds.

Our paper has policy implications. In 2011, the PCAOB staff conducted inspections of 213 audit firms and reviewed portions of approximately 820 audit engagements, finding that audit firms may not be executing engagement quality reviews appropriately under Auditing Standard No. 7. One of the main factors identified in the report is that senior partners fail to devote enough time to engagement quality reviews or do not conduct their reviews in a timely fashion. Consistent with this PCAOB report, our study suggests that senior partners should limit the number of hours they work because they do not perform an effective monitoring role under heavy workloads. Our collective evidence that audit partner workload compression negatively affects audit quality sheds insights into the recent PCAOB suggestion to monitor individual auditor workloads.

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