THE PARTNERSHIP STRUCTURE OF THE AUDIT FIRM: GOVERNANCE OF AUDIT FIRMS AND ITS IMPLICATIONS ON THE AUDIT FIRM AND AUDIT QUALITY
The relationship between the client and the auditor could explain variance in audit quality. We propose a complimentary explanation, with a focus on the governance of the audit firm. Audit firms are governed by partners and its partnership structure. We explore theoretically how the number of partners and especially, how the partnership concentration, i.e., number of partners/number of auditors and experts in an audit firm, influence the audit firm and the audit quality. We find that both number of partners and partnership concentration influence the partners and the organisation towards more commercial actions and reduce the audit quality, but only to a certain level. Our policy recommendation is that regulators should not only focus on the relationship between the client and the auditor, for example NAS and rotation of auditors, but also on the governance of the audit firms.