Audit Partners’ Risk Tolerance and the Impact on Audit Quality

63 Pages Posted: 8 Jan 2019 Last revised: 18 Jul 2019

See all articles by Jeffrey Pittman

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Sarah E. Stein

Virginia Tech

Delia F. Valentine

Virginia Tech

Date Written: July 18, 2019

Abstract

Relying on their history of legal infractions to measure individuals’ risk tolerance, we examine the impact of engagement partners’ risk appetites on audit quality in the U.S. Criminology and economics research links criminal activity with enduring personality traits that capture an individual’s tolerance for risk. Consistent with expectations, we document that partners known to engage in risky behaviors conduct lower quality audits. More specifically, we find that clients of more risk-tolerant partners exhibit greater propensity to misstate and less timely loss recognition, while also paying lower audit fees. This evidence is robust to several alternative research design specifications, including propensity score matching techniques and additional measures of partner risk tolerance. Reflecting that the Big 4 audit firms have more robust quality control systems, more standardized audit procedures, larger audit teams that potentially narrow the scope for engagement partner characteristics to matter, and more valuable reputations to protect, we generally find that the Big 4 better constrain risk-tolerant partners from undermining audit quality. Collectively, our analysis contributes to emerging research on the role that individual audit partner characteristics play in shaping audit outcomes.

Keywords: audit partner, audit quality, risk tolerance, legal infractions

JEL Classification: M40, M42, K42

Suggested Citation

Pittman, Jeffrey A. and Stein, Sarah E. and Valentine, Delia F., Audit Partners’ Risk Tolerance and the Impact on Audit Quality (July 18, 2019). Available at SSRN: https://ssrn.com/abstract=3311682 or http://dx.doi.org/10.2139/ssrn.3311682

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Sarah E. Stein (Contact Author)

Virginia Tech ( email )

Blacksburg, VA 24061
United States

Delia F. Valentine

Virginia Tech ( email )

VA
United States

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