Audit Quality and Trust: The Importance of Audit Partners’ Inherited Culture

Project: Research

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Description

Research in economics suggests that individual judgment and decision making depends not only on formal institutions (e.g., rules, laws, constitutions), but also on informal institutions (e.g., norms, conventions, rituals) (North 1994; Williamson 2000). The latteris often referred to as (inherited) culture and proxied using race/ethnicity (Guiso, Sapienza and Zingales 2015). Inherited culture has been shown to affect a number of decisions including work and fertility choices (Fernandez and Fogli 2009) and tendency to trust (Guiso, Sapienza, and Zingales 2009). However, the effects of inherited culture on auditing have remainedunexplored due to data availability. Until recently, the identity of audit partners was disclosed in only a few countries such as Belgium, China, and Sweden. The challenge with studying the effects of inherited culture in these settings is that these countries have limited variation in cultural backgrounds. For example, most of the audit partners in China share the same cultural background. The PCAOB and the SEC have adopted rules requiring that U.S. audit firms disclose the names of engagement partners for audit reports issued on or after January 31, 2017. This disclosure mandate provides a unique opportunity to test the effects of inherited culture on audit quality due to the multi-cultural nature of the U.S. economy. Using this newly available data, I test the following hypotheses. Audit partners from more trusting countries (“trusting audit partners”) are more likely to make aggressive auditing errors (e.g., issuing a clean audit report when a modified audit report is warranted). On the other hand, audit partners from less trusting countries (“nontrusting audit partners”) are more likely to make conservative auditing errors (e.g., issuing a modified audit report when a clean audit report is warranted). This study responds to calls for research on the role of individual auditors in the audit process. DeFond and Zhang (2014, p. 304) note that “the individual auditor’s competencies are also likely to play a role in providing high quality” and they “encourage future research to consider additional individual auditor characteristics.” Hanlon, Yeung, and Zuo (2021) echo this call in a recent review of the behavioral economics literature in accounting.

Detail(s)

Project number9048253
Grant typeECS
StatusActive
Effective start/end date1/08/22 → …