AAA Spark Meeting of Regions

Range and Specialization: Evidence from Audit Partners Auditing Both Public Companies and Nonprofit Organizations

• In Event: How Audit Partner Skills and Style Impact the Audit

Abstract

We examine the impact of partner economic sector diversification when auditing under different auditing standards (hereafter, “straddling”) on audit reporting. Six (ten) percent of the individual partners conducting public company (nonprofit) audits are “straddlers:” they audit both public companies and nonprofits. The former audits are conducted in accordance with PCAOB auditing standards, while the latter under Uniform Guidance standards. Analyzing partner audit reporting and audit quality outcomes from 2015 to 2018, we find that straddler partners are more likely to have their audited financial statements subsequently restated, suggesting lower audit quality. However, we find that this effect is driven by straddler partners who audit organizations in different industries: industry specialization appears to moderate this effect. Straddler partners with industry overlap are less likely to experience restatements and more likely to issue a going concern modified opinion to a financially distressed company than non-straddlers partners. We also find straddler partners without industry overlap are less likely than non-straddler partners to issue reports indicating internal control deficiencies for nonprofits. Finally, we find that partner straddling is associated with a significant decrease in the timeliness of audit report release for partners without industry overlap but not those with industry overlap across public and nonprofit clients. Taken together, these results suggest that for partners with industry crossover or specialization, auditing organizations in different economic sectors under different auditing standards is not detrimental to audit quality. These findings extend our understanding of the role of partner industry specialization versus economic sector and auditing standards specialization in audit reporting and audit quality.

Authors

• Aleksandra B Zimmerman, Florida State University

• Colleen Boland, University of Wisconsin Milwaukee

• Stefanie Tate, University of Massachusetts Lowell