Audit partner ethnicity and salient audit phenomena

Gopal V. Krishnan, Zvi Singer and Jing Zhang

Accounting, Organizations and Society, 2023, vol. 107, issue C

Abstract: Motivated by ongoing dialog at the national level on racial (in)equality, we examine the relations between audit partner ethnicity (audit partners of Asian, Black, or Hispanic origin) and three salient audit phenomena. Specifically, we examine whether there is a difference in financial reporting quality between the clients of ethnic minority audit partners (EMAPs, hereafter) and those of White partners, whether EMAPs face a different work environment than their White counterparts, and how EMAPs are treated in the audit firm. We find that clients of EMAPs, on average, have earnings that are more predictive of future cash flows, have smaller unsigned discretionary accruals, and are less likely to receive a comment letter from the U.S. Securities and Exchange Commission than clients of White partners. We also find weak evidence that clients of EMAPs have more persistent earnings, lower signed discretionary accruals, and higher audit fees. We do not find evidence of differences in restatement likelihood between the clients of EMAPs and those of White partners. Overall, these results provide some evidence that clients of EMAPs have higher financial reporting quality. Next, we find that, compared to White partners, EMAPs are more likely to work in offices that are smaller, earn lower audit fees, are non-Big 4, and have no prestigious clients. Finally, we find that EMAPs are more likely to be in charge of engagements with clients whose top management (but not whose audit committee) has ethnic representation. We find no evidence that EMAPs are less likely to be engaged with prestigious or important clients. However, we find that, following a financial restatement, EMAPs are more likely than White audit partners to be replaced. Collectively, our findings suggest that even though EMAPs 1) tend to work in less desirable offices, 2) have a client alignment that is affected by ethnic representation in the client's top management, 3) face more severe consequences after audit failure, they are associated with some properties of higher audit quality. This study is one of the first to broadly examine important aspects of the work of EMAPs. We believe that our findings will be of interest to audit firms, audit clients, other related parties, and society at large, especially given audit firms' efforts to improve ethnic diversity.

Keywords: Ethnicity; Audit partner–client association; Homophily; Audit quality; Work environment; Ethnic minority (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0361368223000119
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:aosoci:v:107:y:2023:i:c:s0361368223000119

DOI: 10.1016/j.aos.2023.101440

Access Statistics for this article

Accounting, Organizations and Society is currently edited by Christopher Chapman

More articles in Accounting, Organizations and Society from Elsevier
Bibliographic data for series maintained by Catherine Liu ().