The Role of Auditors' Judgment-Related Traits on Audit Quality: Analysis Combining Survey Data with Archival Information on Individual Auditor Characteristics in China

In response to the calls for research on characteristics of individual auditors (e.g., DeFond and Francis, 2005; Francis, 2011), a number of recent studies examine how auditor characteristics affect audit quality (e.g., Chen et al., 2010; Gul et al., 2013). In Nelson's (2009) conceptual model, an auditor's professional skepticism is determined by their knowledge, traits, and incentives. Current archival research (e.g., Gul et al., 2013), however, provides evidence mainly on the effects of auditors' knowledge (e.g., educational background and prior working experience) and incentives (e.g., position and political affiliation), but little evidence from archival data analyses documents how traits 1 affect audit quality, due to the difficulties in obtaining data on auditors’ trait-related characteristics. As such, prior evidence on the relationship between auditors’ traits and auditor quality are primarily experimental in nature (e.g., Farmer, 1993; Falk et al., 1999; Schatzberg et al., 2005; Liang et al., 2007). The objective of this proposed study is to employ a design that combines survey-based data together with archival data in China to examine the role of auditors’ judgment-related traits on audit quality in an unobstructed setting (as opposed to the obstructed experimental settings used in prior literature). This exploration not only overcomes the inherent limitations of laboratory or experimental settings and complements the findings documented in this stream of research, but also allows for the assessment of the relative importance of traits when compared with the knowledge and incentive effects documented in prior archival research (e.g., Gul et al., 2013).We follow the questionnaire design developed in prior studies (e.g., Zhou and Pham, 2004; Ang and Leong, 2000; Forsyth, 1980; Weber et al., 2002) that measures the relevant trait-related characteristics, and plan to survey as many auditors as possible (at least 200) in China. Combining (triangulating) these traits proxies with archival data on other auditor characteristics manually collected as well as other client-level accounting and market data from electronic databases, we test whether and how audit quality (AQ, measured by audit opinion and quality of audited earnings) are affected by the following four dimensions of auditors' judgment-related traits: (1) based on the regulatory focus theory (RFT) developed by Higgins (1997, 1998), we classify auditors into those with a promotion focus (which is associated with a more risky processing style [Forster et al. 2003]) and those with a prevention focus; (2) given that guanxi is an important element of doing businesses in East Asian cultures including China (e.g., Li, 1992; Ang and Leong, 2000), we examine how AQ is affected by auditors' different perceptions on guanxi; (3) on a more general level we study how auditors with different ethical standards are associated with different AQ (e.g., Falk et al., 1999); and (4) we examine how auditors with different risk preferences (risk-seeking vs. risk-averse) would assess the risk of the audit engagements differently.Since auditors may have less room to exercise their personal characteristics on audit outcomes in large firms on the one hand, but on the other hand large audit firms have higher costs to closely monitor their engagement auditors (Miller, 1992; Gul et al., 2013), we explore the empirical question as to whether the effects of auditor traits on AQ discussed earlier are influenced by audit firm size. Findings of this exploration enrich our understanding on the circumstances where traits have stronger influences on audit outcomes.