Audit Partner Connectedness and Audit Performance

• In Event: Auditor Networks

Abstract

We examine the role of audit partner connectedness to engagement-related networks for audit quality, audit pricing and audit efficiency. Well-connected audit partners are central to overall information flow in the engagement-related network, and therefore are more likely to gain awareness of existing challenges, including changing industry and market trends, faster than less well-connected partners, and so may be better able and faster to respond to changing client situations. The outcome should be a reduction in judgement errors, leading to better audits. We construct an engagement-related network based on having shared audit committee members across engagements, and apply techniques from social network analysis to measure how connected audit partners are to the broader partner network. We then relate our measures of partner network connectedness to common measures of audit quality and audit efficiency. We find better connected audit partners are associated with better audit quality through lower likelihood of client misstatements and smaller client discretionary accruals. We also report that better connected audit partners earn fee premiums, and are more efficient in their audits (are associated with lower report delay). Overall, our results suggest that well-connected audit partners are more effective and efficient at audits. Our study enriches our understanding of the role of the information advantage gained through network connections, and demonstrates how those advantages apply to audit partners for audit outcomes.

Authors

• Bo Gao, The University of Texas at El Paso

• Scott E Seavey, Florida Atlantic University