Audit Partner Ethnicity and Its Relation to Client Assignment, Audit Quality and Discrimination

• In Event: Diversity, Talent, and Volunteerism

Abstract

We find that even though ethnic minority audit partners (those of Asian, Black, or Hispanic origin) represent a low proportion of U.S. audit partners, audit partner ethnicity is significantly related to several important audit phenomena. Consistent with the homophily principle, ethnic minority audit partners are likely to be assigned to clients whose senior leadership includes ethnic minorities. Next, we find that audit partner ethnicity is positively associated with multiple measures of audit quality. Despite the higher audit quality they provide, we find that compared to White partners, ethnic minority audit partners are less likely to work in the more prestigious audit offices: those with more prestigious clients, larger clients, more clients, and Big 4 offices. In addition, ethnic minority audit partners are more likely to be replaced following a financial restatement than their White counterparts, suggesting that audit failures may have greater adverse consequences for ethnic minority audit partners. Our findings point to potential ethnicity-based discrimination in the audit profession. Our evidence has important implications for the PCAOB, audit firms, audit clients, and other related parties.

Authors

• Jing Zhang, University of Colorado-Denver

• Zvi Singer, HEC Montreal

• Gopal V. Krishnan, Bentley University