Racial Segregation and Audit Outcomes
38 Pages Posted: 17 Apr 2023
Date Written: March 1, 2023
We identify endogenously formed same-race audit pairings based on the estimated race of audit partners and auditee executives in the nonprofit sector and show that these pairings occur at a significantly greater than random frequency. Using within auditor-year variation, we find that same-race audits have less frequent going-concern, material non-compliance, and material internal control weakness assessments, particularly for audits performed by auditors located in high residential-racial-segregation areas. The association between auditee financial distress and the issuance of a going-concern opinion is significantly lower in same-race audits, primarily because same-race auditors are less likely to issue a going-concern opinion to a client in financial distress. Overall, these findings suggest that, in same-race audits, lower independence outweighs any reduction in information asymmetry. We suggest that the inability of third parties to explicitly contract over audit outcomes to mitigate agency conflicts explains why our findings differ from findings in other markets.
Keywords: race, ethnicity, audit opinions, audit independence
JEL Classification: J22, J24, J44, K2, L15, L51, M41, M42
Suggested Citation: Suggested Citation