Partnership Disparity and Audit Quality

Abstract

This study explores the effects of partnership disparity within Chinese audit firms on audit quality using novel data on their partnership arrangements. The results indicate a U-shaped relationship between the partnership disparity extent and the violations assessed by regulators, including financial misstatements of clients. Audit firms with mid-level unequal partnership structures achieve superior audit quality than their counterparts with either “flat” or “high-skewed” partnership structures. Additional analyses confirm the role of client complexity as the boundary condition and indicate that the geographical remoteness of audit firms asymmetrically moderates partnership disparity. These results are robust to different audit quality proxies and alternative research designs including change analyses and after controlling for the effects of engagement partners. This study contributes to research on diversity and performance in the partnership context. This approach opens the “black box” of power-related culture in audit firms and carries managerial implications for the managing partners and audit regulators of audit firms.