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Client and audit partner ethnicity and auditor-client alignment

Nathan Robert Berglund (Department of Accounting, Mississippi State University, Mississippi, USA)
John Daniel Eshleman (School of Business and Economics, Michigan Technological University, Houghton, Michigan, USA)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 26 June 2019

Issue publication date: 15 July 2019

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.

Keywords

Acknowledgements

The authors thank Anne Thompson, Tom Omer, Lauren Cunningham, David Rosser, Brent Garza, John Lauck, Keval Amin, Peng Guo and workshop participants at the University of Oklahoma, Louisiana State University, Michigan Technological University, CSU-Northridge and the University of Toledo for helpful comments. The authors thank Professor William Kerr for generously providing ethnicity data.

Citation

Berglund, N.R. and Eshleman, J.D. (2019), "Client and audit partner ethnicity and auditor-client alignment", Managerial Auditing Journal, Vol. 34 No. 7, pp. 835-862. https://doi.org/10.1108/MAJ-10-2018-2036

Publisher

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Emerald Publishing Limited

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