What’s in a name? That may seem like a ludicrous question in the context of commissioning your firm’s annual audit, but academics now conclude that names, or at least their shared origins, may be creating “cultural” affinity that produce better working relationships and, consequently, better audits.
This may shock many. After all, audit is an objective process testing the integrity of a company’s accounting policies and its financial reporting. But audits are built on a relationship between audit engagement partners and chief financial officers (CFOs). Certain variables, according to new research, may be more significant than others in cementing the understanding between them.
Academics Anh Viet Phama, Mia Hang Phamb and Cameron Truongc tested whether “cultural proximity” made a difference in smoothing the audit process. They used the popular website Ancestry.com to check names of audit partners and corresponding executives to see if they could be traced to the same origins. More than 2,000 US audit partner–CFO/CEO pairs were checked this way.
The matched pairs with cultural similarities were then checked against audit quality using “accruals management” as a proxy. The researchers find that accruals management reduces when audit partners and CFOs are culturally matched. The same was not true of audit partner–CEO pairs.
Negative impact of similarities
The writers have some thoughts on why cultural similarities may be influential. Firstly, it might smooth the way for information sharing, both the quality and the quantity, “which helps overcome the issue of asymmetric information in the accounting negotiation,” they write.
More broadly, similarities are “expected to breed connections, facilitate co-operation and, as a result, improve the external monitoring roles of auditors”.
There is potentially a downside. The same factors that may bring CFOs and audit partners together to produce a positive outcome, might also enable them to go astray.
“There are also reasons why audit quality can be negatively affected by cultural proximity between auditors and corporate executives,” the team write. “For example, cultural proximity might make the professional relationship cozy, thereby impairing the independence of auditors.”
Also, the authors warn, cultural proximity might not work well in places that involve innovations and problem-solving because it could induce “group think”.
The findings could be important for the way audit engagement partners are appointed, though more likely it may just produce a handy signal to sense-check an ongoing working relationship.
Either way, the research offers another intriguing dimension to the debate surrounding audit and how to maintain the independence of auditors at a time when audit remains a highly contentious issue.