Audit Quality: An Analysis of Audit Partner Cultural Proximity to Client Executives

Forthcoming at The European Accounting Review

72 Pages Posted: 30 Dec 2021

See all articles by Anh Pham

Anh Pham

Newcastle Business School, University of Newcastle

Mia Pham

Massey University

Cameron Truong

Monash University; Financial Research Network (FIRN)

Date Written: December 29, 2021

Abstract

We find that cultural proximity between auditors and CFOs is associated with audit quality. We use recent mandated PCAOB disclosures of engagement audit partners to construct cultural proximity between engagement audit partners and client executives. Building on an extensive literature on homophily in social connections, we hypothesize that when an engagement audit partner is culturally close to client executives, the accounting negotiation is more efficient, resulting in higher audit quality. Consistent with this prediction, we find that audited earnings are of higher quality when the engagement audit partner is culturally close to the CFO. We, however, do not find similar evidence when the engagement audit partner is culturally close to the CEO. Our findings are consistent across several alternative measures of audit quality and cultural proximity. These findings suggest that interpersonal factors from the auditor–client relationship are important for audit outcomes. Our study supports the PCAOB’s position that mandatory disclosures of engagement audit partner identity are helpful in understanding audit quality.

Keywords: cultural proximity, audit partner, audit quality, CFOs, CEOs, reporting quality

JEL Classification: G32; H25; H26; M40

Suggested Citation

Pham, Anh Viet and Pham, Mia and Truong, Cameron, Audit Quality: An Analysis of Audit Partner Cultural Proximity to Client Executives (December 29, 2021). Forthcoming at The European Accounting Review, Available at SSRN: https://ssrn.com/abstract=3996450

Anh Viet Pham (Contact Author)

Newcastle Business School, University of Newcastle ( email )

University Drive
Callaghan, NSW 2308
Australia

Mia Pham

Massey University ( email )

Private Bag 11 222
Palmerston North, Manawatu 4442
New Zealand

Cameron Truong

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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