The Importance of Audit Partner Characteristics on Audit Quality: Evidence from Nonprofits in the U.S.

• In Event: Auditing of Local Governments and Nonprofits

Abstract

We investigate whether individual auditor characteristics such as gender, busyness, tenure, and ownership in the audit firm are associated with audit quality in nonprofit organizations. Our empirical results show that, across all sizes of accounting firms, female auditors are more conservative than male auditors and are more likely to report internal control problems and issue qualified opinions for NPOs receiving government grants. We find that auditors aligned with more Single Audit clients are more likely to report internal control deficiencies (ICD), contrary to theory that suggests “busy” auditors are over-committed to perform their duties effectively. Auditor tenure is negatively associated with the likelihood of issuing an ICD report, suggesting that auditors either become complacent as tenure increases, or, alternatively, as they gain client-specific knowledge over time, are better able to assist the client in correcting internal control problems and maintaining a stronger internal control environment. Owner auditors are also more likely to issue ICD reports, supporting our hypothesis that ownership in the firm provides a greater incentive for auditors to be more diligent in identifying and reporting ICDs.

We find that the average results from the pooled regressions, however, are driven primarily by small audit firms and obscure significant differences in the importance of individual auditor characteristics for non-Big 4 versus Big 4 firms. In particular, for Big 4 auditors, tests of the three adverse audit outcomes reveal auditor-specific factors are insignificantly different than zero. One explanation for this result is that the Big 4 firms develop audit programs and procedures, hire and train auditors, and then provide an environment that motivates auditors to comply with the firm’s established procedures. In addition, Big 4 auditors are able to obtain in-house expertise. Thus, individual auditor characteristics do not matter in Big 4 firms. For small audit firms, the results of tests investigating individual auditor characteristics and audit quality are strikingly different. Our findings suggest that auditors in small accounting firms may have more opportunities than auditors in the bigger firms to make individual decisions regarding auditing and reporting procedures since fewer training opportunities and well-established standards exist at smaller audit firms.

Authors

• Nancy Chun Feng, Suffolk University

• Karen Ann Kitching, George Mason University

• Linda Ann Myers, University of Arkansas