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Who Says Opposites Attract?

Al Nagy

When it comes time for a company to conduct an audit, it hires an audit firm. Then it’s up to the audit firm to choose which of its partners will head up the audit, or at least that’s how it ostensibly works. But in reality, research conducted outside of the United States shows that it’s the preferences of the client company’s directors and managers that influence which audit partner is chosen. And, contrary to the axiom “opposites attract,” they usually prefer someone with characteristics similar to their own.

It’s not clear from these non-U.S. studies, though, that choosing an audit partner based on characteristics guarantees a top-notch audit. For example, a study in Sweden found that experienced auditors, who might be expected to be the best in the business, actually have a negative effect on audit quality: as they draw nearer to retirement, they move farther away from caring about career aspirations and turning in high-quality audits.

So, what does all this say about auditor selection and audit quality inside the United States? Not much. The audit environment in the United States is different from other countries—more regulated and much more litigious. And there hasn’t been any research done on auditor selection in the United States because until recently (2017), researchers have had a hard time figuring out who exactly was doing the audits: audit partners didn’t sign audit opinions and audit firms weren’t required to reveal their identities.

But that didn’t stop Albert Nagy in the Boler School of Business, along with his coauthors Hye Seung (Grace) Lee and Aleksandra Zimmerman, from tackling the problem. They found a way to uncover auditor identity in their article “Audit Partner Assignments and Audit Quality in the United States” published in The Accounting Review. Using this information, they zeroed in on two characteristics—gender and experience—and asked two questions: (1) Are auditors who are female and experienced more likely to lead the audits of companies that have female and experienced directors/managers? (2) Do auditors who are female and experienced influence audit quality?

To determine which auditors are female and experienced, the authors hand collected responses from companies that received inquiries (called “Comment Letters”) from the U.S. Securities and Exchange Commission between 2004 and 2015. In the responses, the companies often copied their auditors. Armed with these auditor names, the authors searched professional websites to identify characteristics of the audit partners—including gender and age (which in this study proxies for experience)—and created two samples: 1,191 gender observations and 787 experience observations.

What they found was that, like in other countries, companies in the United States prefer audit partners who share characteristics with their directors/managers. Specifically, women are 9.1% more likely to be chosen as the lead audit partner when the client company has at least one woman on the board of directors and one woman serving as an executive, and 16.1% more likely when it has a woman on its audit committee. As for experience, a 10% increase in the average age of directors leads to a 4.4% increase in audit partner experience.

But do female and experienced auditors affect audit quality? For female auditors, the answer is yes, but only weakly. For experienced auditors? No. Nevertheless, companies are willing to pay higher fees to have their audits led by female and more experienced audit partners. There are a couple of possible reasons for this: (1) Female auditors are better at their jobs than their male colleagues because they have to be—they’ve had to battle both gender discrimination and competition to win their spot as audit partner. (2) Female auditors, with their higher level of expertise, are often assigned to riskier clients.

What this study doesn’t tell us is why the audits of gender-diverse companies are more likely to be led by a female audit partner. Is it because these companies signal their desire for a woman? Or it is because the audit firm assumes that a gender-diverse company prefers a woman? These questions are left for another day, and another round of research.


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