Audit Partner Style and Financial Statement Comparability: New Evidence from the U.S. Market

76 Pages Posted: 13 Aug 2019 Last revised: 15 Jun 2021

See all articles by Derrald Stice

Derrald Stice

University of Hong Kong - HKU Business School

Tracie Frost

Hong Kong Polytechnic University

Chris He

Florida Atlantic University

Xin Luo

Marquette University

Date Written: May 1, 2021

Abstract

We investigate the effect of audit partner style on financial statement comparability in a U.S. setting using newly-available data from 2016 to 2020. We document an audit partner style effect on comparability incremental to audit firm and audit office effects. Our results are consistent across several comparability measures (accruals similarity, audit fees, and audit report lag), and our findings are economically significant. For example, controlling for the effect of the same Big 4 audit firm and office, the audit partner effect leads to a 15.94% decrease in the mean difference in discretionary accruals compared to a 6.5% (0.07%) decrease for firm pairs audited by the same Big 4 audit office (Big 4 audit firm). Our results are robust to controlling for product similarity, auditor switching, propensity score matching, placebo tests, and self-selection tests. Our findings support the PCAOB’s assertion that internal firm monitoring mechanisms are not enough to fully overcome individual partner’s agency-related incentives and that audit partners are able to exert their own personal style on the financial statements of the firms they audit.

Keywords: audit, audit partner, comparability, agency theory

JEL Classification: M4, M41, M42

Suggested Citation

Stice, Derrald and Frost, Tracie and He, Chris and Luo, Xin, Audit Partner Style and Financial Statement Comparability: New Evidence from the U.S. Market (May 1, 2021). Available at SSRN: https://ssrn.com/abstract=3433365 or http://dx.doi.org/10.2139/ssrn.3433365

Derrald Stice

University of Hong Kong - HKU Business School ( email )

Hong Kong, HK
China

Tracie Frost (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon
Hong Kong

Chris He

Florida Atlantic University ( email )

Boca Raton, FL 33431
United States

Xin Luo

Marquette University ( email )

David A. Straz, Jr. Hall
Milwaukee, WI 53233
United States

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