Does Individualism Reduce Financial Reporting Comparability? Evidence from Audit Partner Individualism in the U.S.

Abstract

We examine whether individualism reduces financial reporting comparability using audit partner individualism in the U.S. We argue that individualistic audit partners are more likely to have non-holistic thinking styles and to resist conformity pressure from peers, thereby lowering their clients’ financial reporting comparability. Using a novel measure of individualism, we find that within a Big 4 audit firm, earnings are less comparable between a company audited by an individualistic partner and a company audited by a non-individualistic partner, relative to a pair of companies that are each audited by a non-individualistic partner. Results are robust to a changes analysis, a falsification test, an alternative measure of individualism, a company-level analysis, and controlling for partners’ cultural backgrounds. We also find that the effect of partner individualism is less salient in low-quality audit firms. Our study provides novel company-level evidence on the role of individualism in financial reporting comparability.

Keywords: Earnings comparability; Individualistic culture; Uncommon names; Audit partner individualism

JEL Classification: M41, M42