Which Engagement Partner Pays the Price for Misstatements?

In this study, I examine the reputational consequences for U.S. audit partners based on their role in a misstatement. I construct a sample of audit partners that are associated with a restatement announced between 2017-2021 and deem an audit partner to be “culpable” (“non-culpable”) if they audit (do not audit) the financial statements in the misstatement period. At the client level, I find some evidence of reputational consequences for culpable audit partners in the form of non-mandatory rotation away from the restating client, but not other clients, and this effect is primarily among Big 6 audit clients and persists for at least two years. In contrast, non-culpable audit partners suffer this direct reputational cost, but it materializes two years after the restatement announcement and at their non-restating clients. At the partner level, both culpable and non-culpable partners suffer overall negative portfolio consequences following a restatement. This effect is concentrated among Big 6 audit partners. Taken together, the findings of this study show that restatements have real economic consequences for the careers of audit partners and that these consequences vary with their role in the misstatement, and Big 6 status.