Client and audit partner ethnicity and auditor-client alignment

Abstract

Purpose The purpose of this study is to examine the role of ethnic similarity in the audit partner–client manager relationship and its impact on auditor selection and retention decisions. Design/methodology/approach The authors use name matching analysis to infer ethnicity of audit partners and client managers in the US nonprofit reporting environment. The authors examine the degree of ethnic similarity (co-ethnicity) between the two parties and model auditor selection and retention decisions as a function of co-ethnicity. The authors also model reporting attributes as a function of co-ethnicity. Findings The authors find that the ethnic similarity between the client manager and their external audit partner is a significant determinant of auditor-client alignment. Specifically, the authors find that clients are more likely to select and retain an audit partner who is ethnically similar to the client manager. The authors find that co-ethnicity is associated with a lowered propensity to issue a going concern opinion to a financially distressed client and an increased occurrence of underreporting of fundraising and administrative expenses. Research limitations/implications Taken together, the evidence suggests that ethnic diversity (the opposite of co-ethnicity) in the auditor-client relationship is associated with higher audit quality. These findings are relevant to client managers, audit committees and public accounting firms as they make auditor selection and reporting decisions. Originality/value Prior studies have found that co-ethnicity influences the formation and future success of various business partnerships. The auditor-client relationship is a unique setting within the business environment where the two parties must balance their desire to maintain a close relationship with their need to maintain independence. The study is the first to examine the role of ethnicity in the auditor-client relationship.

Pengaruh Kualitas Audit Terhadap Earnings Management Pada Perusahaan Manufaktur Yang Terdaftar Di Bursa Efek Indonesia

“…Jumlah manipulasi keuangan dapat diidentifikasi oleh auditor berdasarkan kualitas layanan audit yang diberikan (El-Dyasty & Elamer, 2021). Kualitas audit yang dimaksud didasarkan pada pengetahuan dan keahlian auditor yang dapat membantu perusahaan dalam mendeteksi permasalahan yang kompleks di industri tertentu (Berglund & Eshleman, 2019).…”

Auditor-client relationship and related party transactions disclosure: the role of family controlling shareholders from a network perspective

“…Hence, clients may not be aware of the availability of audit services. Due to this, clients rely on personal contacts or friends' recommendations to decide on an auditor's appointment (Hope et al, 2012;Guan et al, 2016;Berglund and Eshleman, 2019;Christensen et al, 2019). For example, Beattie and Fearnley (1998) showed that 74% of clients knew their auditor before the appointment.…”

“…(1) auditors are appointed from among the management's close connections (Gordon et al, 2007;Berglund and Eshleman, 2019); and (2) close social relationships that develop over time.…”

In auditor we trust: 44 years of research on the auditor-client relationship and future research directions

“…Other ACR attributes related to intrapersonal and interpersonal contexts have been heavily discussed. These include ethnicity (Berglund and Eshleman, 2019), leadership (Svanberg et al , 2017), social bond, trust and commitment (Kuenzel and Krolikowska, 2008; Kerler and Killough, 2009; Aschauer et al , 2017), reputation (Donelson et al , 2019) and communication between auditors and their clients (Kachelmeier, 2018; Saiewitz, 2018). Table 8 summarises the various attributes and their relation to the theoretical perspective.…”

“…Psychology theories explain some ACR attribute issues regarding pressures, audit tender or selection and fraud incentive (Lord, 1992; Chang and Stone, 2019; Zimbelman, 1997). Sociology theories ( institutional, social presence, sociological inclination and social learning theories ) are predominantly applied to explain issues regarding the audit market, communication between auditors and clients, ethnicity and performance improvement (Ma'ayan and Carmeli, 2016; Berglund and Eshleman, 2019; Kachelmeier, 2018; Saiewitz, 2018; Han, 2000).…”