The Relative Importance of Auditor Characteristics Versus Client Factors in Explaining Audit Quality

Abstract

The U.K. listed firms are used to investigate whether auditor attributes (fixed effects for audit firms, audit offices, and audit partners) add incrementally to baseline models with client controls in explaining audit quality. We document that accounting firm fixed effects add significantly to baseline models. To the extent an accounting firm can standardize its audits, there should be no differences across engagements. However, we find significant interoffice differences, and also significant inter-partner differences within offices. R2 analyses, hierarchical linear models, LASSO (least absolute shrinkage and selection operator) regressions, and R2 decomposition analyses all show that partners are the most important auditor-related characteristic. To better understand the cause of partner variation, we test a set of partner demographic variables (in lieu of partner fixed effects), but we find that they explain little variation, once we control for firm and office differences. We conclude that partner variation is important in explaining audit quality, but understanding the causes requires going beyond existing publicly available demographic data.

The Effects of Audit Partners on Financial Reporting: Evidence from U.S. Bank Holding Companies

“…The F-statistic for joint significance is large and significant, suggesting that idiosyncratic audit partner style affects BHCs' provisioning. This result is consistent with prior research, such as Gul et al (2013) and Cameran et al (2020), who study…”

“…Using data on Chinese firms, Gul et al (2013) document an increase in adjusted R 2 after adding audit partner fixed effects and conclude that audit partner characteristics affect accounting quality. Cameran et al (2020) use the same fixed effects methodology to test for partner heterogeneities in the U.K. and find that partner fixed effects have greater explanatory in explaining the variation in earnings quality, GC reporting, and audit pricing. Taylor (2011) uses Australian data for 2005 to test whether audit fees are affected by partner characteristics and finds that audit fees are significantly affected by partners' innate characteristics.…”

Tacit knowledge sharing in small audit firms and audit quality inputs: the antecedent effect of auditors’ social capital

“…Bol et al (2018) indicated that tacit knowledge sharing is essential in developing individual auditors and building audit firms' human capital, leading to higher quality audits. Likewise, Cameran et al (2020) concluded that tacit knowledge sharing is positively associated with the firm's internal evaluation of auditors' competencies and audit quality. According to the argument above and, individuals' knowledge sharing willingness is one of the strong predictors of actual individual knowledge sharing behaviour (Ajzen, 1991(Ajzen, , 2002.…”

“…The global financial crises have demonstrated the significant importance of high-quality financial reporting. Producing quality financial reporting is tied to each participant’s integrity in the financial reporting supply chain (Cameran et al , 2020; Sun et al , 2020). As one of those participants, auditors play a crucial role in achieving the quality of financial reporting worldwide by performing a high-quality audit of clients’ financial reports (Kueppers and Sullivan, 2010).…”

“…Networks members not committed to these norms are subject to an obligation of punishment in future interactions (Sun et al , 2020). Therefore, social capital represents an incentive for auditors to align their values, ethics and attitudes with the public interest, as well as, improve their skills and sustain professional standards to maintain their social networks (Cameran et al , 2020). Moreover, Figure 1 shows an analytical framework for studying knowledge sharing developed by Lin (2007) that comprises three aspects.…”