Weak Incentives for Audit Quality: Evidence from Broker-Dealers

47 Pages Posted: 9 Jan 2021 Last revised: 10 Nov 2023

Date Written: December 3, 2022


I study whether audit quality predictions based on incentives and competence generalize to a setting with weak incentives, the broker-dealer industry. Specifically, I use proprietary data to test whether larger firms and industry specialists provide better audit quality, as proxied by audit adjustments. Consistent with prior literature, I find that larger firms provide higher audit quality. In contrast, industry specialists perform worse than non-specialists; industry specialist partners in small firms drive this result. These findings suggest that clients with weak demand for auditing hire low quality auditors, who in turn gain market share in the industry. Consequently, this study not only advances understanding of broker-dealer audit quality, but also reveals that clientele-based measures proxy for client preferences as well as industry specialization.

Keywords: Audit Adjustments, Auditor Size, Audit Partner, Broker-Dealer, Incentives, Industry Specialization, Private Entities

JEL Classification: M21; M41, M42, M48, G24, G28, D14, D18

Suggested Citation

Kowaleski, Zach, Weak Incentives for Audit Quality: Evidence from Broker-Dealers (December 3, 2022). Available at SSRN: https://ssrn.com/abstract=3733060 or http://dx.doi.org/10.2139/ssrn.3733060

Zach Kowaleski (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX Texas 78712
United States

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