Client and Audit Partner Ethnicity, Auditor Selection, and Audit Quality

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 8: Audit Quality II

Abstract

This study examines the role of ethnic similarity in audit partner-client management pairing and its associations with audit quality and client internal control quality. Using surname matching analysis to estimate the ethnicity of client managers and audit partners, we find that the ethnic similarity between the audit partner and the client financial manager (co-ethnicity) is a significant determinant of auditor selection and retention decisions. Specifically, we find that clients are significantly more likely to select an audit partner who is ethnically similar to the manager. We also find that, following manager switches, the likelihood of an auditor change is significantly lower when the incumbent audit partner and the new manager share the same ethnicity. When we investigate the audit and client quality implications of these results, we find no association between co-ethnicity and audit quality measured using the propensity to issue a going concern opinion. We also find that clients who select co-ethnic auditors have weaker internal controls. These findings are useful to public accounting firms and to audit committees who approve auditor selection and make auditor retention decisions.

Authors

• Nathan R Berglund, Mississippi State University

• John Daniel Eshleman, Oklahoma State University