Audit Quality: An Analysis of Audit Partner Cultural Proximity to Client Executives
Forthcoming at The European Accounting Review
72 Pages Posted: 30 Dec 2021
Date Written: December 29, 2021
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: Suggested Citation