The Impact of U.S. Audit Partner Style on Financial Statement Comparability

Abstract

We investigate the effect of audit partner style on financial statement comparability in a U.S. setting. We document an audit partner style effect on comparability incremental to audit firm and audit office effects. Our results are consistent across our comparability measures (accruals similarity, earnings covariation, audit fees, and audit report lag), and our findings are economically significant. For example, controlling for the effect of the same Big 4 audit firm and the same Big 4 audit office, the audit partner effect leads to a 22.4% decrease in discretionary accruals compared to a 9% (1.3%) decrease for firm pairs audited by the same Big 4 audit office (Big 4 audit firm). Our results are robust to controlling for product similarity, auditor switching, propensity score matching, placebo tests, and self-selection tests. Our findings support the PCAOB’s assertion that internal firm monitoring mechanisms are not enough to fully overcome individual partner’s agency-related incentives and that audit partners are able to exert their own personal style on the financial statements of the firms they audit.