What’s in a Name? Reputation and Monitoring in the Audit Market

Working paper 675
Somdutta Basu and Suraj Shekhar
Publication date: 
March, 2017

We demonstrate a tension between monitoring and reputation incentives when moving from collective reputation environments to individual reputation environments by analyzing a new rule. After January 2017, the name of the engagement partner has to be disclosed in all audit reports issued in the USA. We study the resulting change in auditor incentives and show that while the consequent higher reputation incentives can improve audit quality, partners have a lower incentive to monitor other partners when names are disclosed. This may lead to a fall in audit quality when the rule is implemented. We present several solutions to this problem.

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