Audit engagement partner ideology, ideological homophily, and audit quality

Abstract

AbstractPrevious studies have shown that audit quality is influenced by the audit engagement partner's characteristics. Extending this literature, we examine the association between audit engagement partner ideology (i.e. conservatism) and audit quality. We find that clients whose audit engagement partners are ideologically more conservative receive higher quality audits, as indicated by lower discretionary accruals than clients with less conservative auditors. Additionally, we find evidence that the relation between the auditor's ideology and that of the client's executives influences audit quality, as does the ideological homophily between the auditor and the client's audit committee. Homophilous pairings between the audit engagement partner and the client's executives, where the two parties share a similar ideology, are associated with both higher discretionary accruals and higher probabilities of restatement. Discretionary accruals are also shown to be higher when engagement partners share an ideology with their client's audit committee. We interpret these results as evidence of less effective monitoring by the engagement partner when they share political views with their clients.