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Client and audit partner ethnicity and auditor-client alignment

Author

Listed:
  • Nathan Robert Berglund
  • John Daniel Eshleman

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.

Suggested Citation

  • Nathan Robert Berglund & John Daniel Eshleman, 2019. "Client and audit partner ethnicity and auditor-client alignment," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 34(7), pages 835-862, June.
  • Handle: RePEc:eme:majpps:maj-10-2018-2036
    DOI: 10.1108/MAJ-10-2018-2036
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    Citations

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    Cited by:

    1. Kris Hardies & Sarowar Hossain & Larelle (Ellie) Chapple, 2021. "Archival research on audit partners: assessing the research field and recommendations for future research," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4209-4256, September.
    2. Krishnan, Gopal V. & Singer, Zvi & Zhang, Jing, 2023. "Audit partner ethnicity and salient audit phenomena," Accounting, Organizations and Society, Elsevier, vol. 107(C).
    3. Marziana Madah Marzuki, 2022. "Audit Committee Diversity, Analysts’ Forecast Accuracy and Earnings Management: Evidence from Malaysia," JRFM, MDPI, vol. 15(4), pages 1-27, April.

    More about this item

    Keywords

    Diversity; Auditor selection; Not-for-profit; Going concern opinion; M41; M42; J15; J70;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • J70 - Labor and Demographic Economics - - Labor Discrimination - - - General

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