Does Individualism Reduce Financial Reporting Comparability? Evidence from Audit Partner Individualism in the U.S.
Posted: 8 Nov 2021 Last revised: 14 Jul 2022
Date Written: July 14, 2022
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
Suggested Citation: Suggested Citation