Second Partner Review: An Analytical Model

This paper develops an analytical model to examine the role that second partner review plays in promoting accurate, unbiased decisions by an engagement partner who possesses imperfect information and is subject to economic pressures to bias judgment. Optimal strategies are derived in a single-period model. The model includes an engagement partner and a second partner who both choose a sample size and a qualified or unqualified audit report. The analysis identifies conditions under which second partner review induces the engagement partner to report with greater independence. In addition to providing predictions immediately testable in an experimental context, the comprehensive example demonstrates that second partner review can cause the engagement partner not only to report with greater independence but also to sample more.

Central to our analysis is a general audit reporting model that applies to both one-partner and two-partner situations. This model provides definitions and demonstrates the effect of auditor independence and competence and the sufficiency and competence of evidential matter, audit risk, client pressure, and societal penalties (e.g., legal and reputational costs) on an audit partner's reporting decision. Moreover, it demonstrates the importance of the engagement partner's competence and work effort, as well as the reduction of underlying audit risk, in countering client pressure and promoting independent reporting. Because of the rigorous definitions of auditing concepts and the number of variables included, the model provides a flexible structure for studying other auditor reporting situations.