This study explores the mandatory Engagement Partner Signature (EPS) requirement’s influence on earnings management within UK firms. EPS was designed to enhance auditor accountability and improve audit quality; however, it may unintentionally support symbolic assurance, allowing firms to project regulatory compliance while continuing manipulative earnings practices. The paper assesses whether EPS fulfills its intended purpose or merely serves as a ceremonial mechanism, especially in environments with low litigation risks and fee dependencies.
The study employs a difference-in-differences (DID) methodology, comparing UK firms affected by EPS to firms in France, Germany, Luxembourg and the Netherlands, where EPS was implemented earlier. Earnings management is quantified using proxies for real activities manipulation and discretionary accruals, incorporating firm and country-level controls. Robustness tests verify results against alternate periods and auditor/client characteristics.
EPS implementation in the UK led to increased earnings management, both through real activities manipulation (e.g. abnormal production costs) and accrual management. The findings indicate that smaller auditors and fee-dependent firms exploit EPS as a symbolic compliance tool, signaling audit quality without substantive improvements. Greater litigation risk mitigates these effects.
The study is limited to European firms and the EPS framework, with findings specific to low-litigation-risk environments. Generalizability to other regulatory interventions and cultural contexts requires further exploration. Future studies could assess whether stricter enforcement policies mitigate symbolic compliance behaviors.
Policymakers should reconsider EPS regulations, accounting for auditor heterogeneity and firm-specific characteristics such as litigation risk and auditor dependency. Enhanced oversight mechanisms should be implemented to ensure EPS achieves its goal of improving audit accountability rather than facilitating symbolic assurance for earnings manipulation.
EPS may undermine trust in financial reporting by perpetuating a facade of accountability, particularly in industries with weaker regulatory scrutiny. Symbolic assurance allows firms to appear compliant without improving audit rigor, failing public expectations of transparency and ethical practices.
This paper contributes to audit regulation literature by critiquing EPS through the lens of symbolic assurance, offering robust empirical analysis and insights on auditor behavior under compliance pressures. It highlights vulnerabilities in regulatory frameworks and suggests tailored interventions to ensure substantive audit improvements.
