In their 2025 article “Determinants and Market Consequences of Audit Partner Changes After Restatements”, James G. Lawson and Daniel A. Street examine a subtle but meaningful response to financial restatements. Instead of replacing their audit firm entirely, some companies opt to change the individual audit partner assigned to their engagement. This decision, though less visible than a full firm switch, may still carry reputational and regulatory implications. Published in the Journal of Accounting and Public Policy, the study explores the determinants of such changes and whether they influence investor perception.
The authors analyze a sample of 1,536 U.S. companies that restated their financial statements between 2018 and 2022. They find that nearly one-quarter of these companies replaced their audit partner before the mandatory five-year rotation period. This practice became observable only after the introduction of Form AP by the PCAOB in 2017, which requires public disclosure of the engagement partner. The study aims to understand whether these changes are driven by efforts to rebuild trust or by economic and institutional dynamics within the client-auditor relationship.
One of the key findings is that economically important clients, measured by the fees they pay to their audit firm, are significantly more likely to initiate a premature partner change. This suggests that large clients have influence over their auditors that extends beyond the formal boundaries of independence. In contrast, severe restatements, particularly those requiring a reissuance of past financials, increase the likelihood of a full firm switch rather than just a partner change. Firms with longer audit relationships tend to maintain the status quo, indicating that tenure creates a barrier to change even after reputational shocks.
To assess these patterns, the authors use multivariate regression models, including controls for auditor size, firm tenure, restatement severity, and client characteristics. Interestingly, they find that the presence of a Big 4 audit firm does not reduce the likelihood of a partner change, contradicting the common belief that switching costs protect large firms from client pressure. Instead, the study shows that client-auditor economic dependence plays a more important role in shaping audit-related decisions.
The researchers also investigate whether the market reacts to these changes. They calculate cumulative abnormal returns in the five-day window around the disclosure of audit partner changes and find no significant investor response. This is true even in cases involving severe restatements. In contrast, companies that replace their audit firm after a restatement experience a statistically significant negative return, suggesting that investors see firm changes as meaningful while dismissing partner changes as symbolic or insufficient.
These findings raise questions about the effectiveness of transparency efforts like Form AP. Although the policy was designed to improve accountability and empower investors, the study suggests that current disclosures may not be informative enough to influence decision-making. To improve transparency, the authors propose new disclosure rules that would require firms to explain the reason for a premature partner change, including whether it was requested by the client and whether it followed a restatement.
The study contributes to the literature on audit governance and regulatory policy by showing that engagement partner changes are more common than previously assumed and that they are influenced by client leverage. Yet, without sufficient market reaction, the signaling power of these changes remains weak. This finding has implications for how audit quality is monitored and how audit oversight bodies design disclosure frameworks.
Ultimately, the research by Lawson and Street challenges the idea that all forms of auditor change are interpreted equally by the market. While replacing an audit firm signals a clear break from the past, changing a partner appears to fall below the threshold of meaningful reform in the eyes of investors. As audit regulation continues to evolve, greater attention to the dynamics of individual accountability and client influence will be essential.
The full article “Determinants and Market Consequences of Audit Partner Changes After Restatements” by James G. Lawson and Daniel A. Street was published in the Journal of Accounting and Public Policy in June 2025 and is available online.