The Effect of Social Identity on the Financial Reporting Aggressiveness of Former Auditors
59 Pages Posted: 25 Apr 2019 Last revised: 6 Sep 2019
Date Written: Septemvber 5, 2019
In this study, we leverage social identity theory to study the financial reporting behavior of chief financial officers (CFOs) with prior auditing experience. Social identity theory suggests that the values learned within a profession are likely to influence behavior after an individual leaves the profession. Our tests indicate that, on average, CFOs who were former auditors report less aggressively than CFOs without previous auditing experience. Thus, the public accounting social identity – which should include a mindset that values ethical, conservative, and transparent financial reporting – appears to persist when auditors take high-level positions in industry. However, we also find that the reporting behavior of prior-auditor CFOs becomes more aggressive over time as the salience of their public accounting experience decays. Auditors appear to adjust effort similarly, as audit fees are lower for clients with prior-auditor CFOs but increase as the CFOs’ time away from public accounting increases. Overall, our study provides support for social identity theory in a new setting and offers important insights regarding how public accounting socialization impacts the financial reporting behavior of top executives.
Keywords: Financial Reporting, Social Identity, Socialization, Auditing, Discretionary Accruals
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