Racial Segregation and Audit Outcomes

38 Pages Posted: 17 Apr 2023

See all articles by Hans Christensen

Hans Christensen

University of Chicago - Booth School of Business

Mark G. Maffett

University of Miami - Department of Accounting

Felix Vetter

University of Mannheim

Date Written: March 1, 2023

Abstract

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

Christensen, Hans and Maffett, Mark G. and Vetter, Felix, Racial Segregation and Audit Outcomes (March 1, 2023). University of Miami Business School Research Paper No. 4407376, Available at SSRN: https://ssrn.com/abstract=4407376 or http://dx.doi.org/10.2139/ssrn.4407376

Hans Christensen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Mark G. Maffett (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

Felix Vetter

University of Mannheim ( email )

L 7, 3-5
Mannheim, 68161
Germany

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