Individual Auditor Style and Audit Quality in a High Reputation Risk Setting
51 Pages Posted: 9 Oct 2017
Date Written: September 27, 2017
This paper tests whether the “style” of individual auditors shapes abnormal accruals in a setting where reputation risk is the main driver of audit quality. The German audit environment is characterized by high reputation risk and is one of the few where listed companies are required to report the names of individual engagement and review partners. This allows us to use the methodology pioneered by Bertrand and Schoar (Quarterly Journal of Economics 118, 2003: 1169-1208) and apply fixed effects models to measure the impact of individual auditors’ style on audit quality. Our results confirm the relevance of reputation risk and suggest that, after controlling for audit firm and audit office effects, individual audit partners have a detectable influence on the abnormal accruals of their clientele. This outcome is consistent with audit quality in German corporations being a function of distinct firm, office, and individual auditor styles. Additional tests show that individual auditor style effects explain the variation in (opportunistic) income-increasing accruals, while income-decreasing accruals are explained by office style effects.
Keywords: Auditor Style, Reputation, Audit Quality, Audit Partner Fixed Effects
JEL Classification: C33, K20, M42, M48
Suggested Citation: Suggested Citation