This paper investigates whether the impact of PCAOB Rule 3211 on the quality and cost of audit services differs between female and male audit partners. We find that the improvement of audit quality is more pronounced for female audit partners than male partners after Rule 3211 adoption. Female audit partners are also associated with higher increases in fees and report lags than male counterparts after the adoption of Rule 3211. Further, we find that the presence of female CFOs (or female audit committee members) attenuate the audit fees and report lag increases in the post-adoption periods. Overall, our findings confirm the importance of the gender effect on audit outcomes, which needs further consideration by standard setters. Our study also provides empirical evidence of the benefits of gender equality in the workplace.
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Gender socialization is a process that educates or instructs women and men to encompass a range of behaviors and attitudes that are generally considered acceptable, appropriate, or desirable for a person based on the person's biological or perceived sex. Gender socialization starts in childhood. Through interaction with people and exposure to society's values, children learn what sex is attributed to them and what roles they are expected to learn. Reinforcement (through rewarding gender-appropriate behavior and punishing what may seem as deviation behavior) socialize children into their genders (Witt 1997).
Francis et al. (2017) find evidence of a contagion effect in reputation concern among clients of an auditor after the auditor experiences a loss of an important client. Further, Chen and Omer (2019) suggest that clients would migrate to a different audit office (not necessary in a different firm) if the current audit office suffers from high rates of audit failures.
A 2018 survey by the Accounting and Finance Women’s Alliance shows that while women are 51% of associate-level staff at U.S. CPA firms, they only make up 24% of partners and principals positions. This may suggest that the corporate power ladder is un-proportional between females and males. https://www.afwa.org/wp-content/uploads/2019/06/2019-accounting-MOVE-report.pdf.
There is a long history of the PCAOB proposing to publicly disclose audit partners’ identification. In early 2009, the board started to consider the requirement of engagement partner signatures and issued Concept Release on requiring the engagement partners to sign the audit reports with the intention to improve audit quality (PCAOB 2009). The reasons for this requirement are to increase the engagement partner’s own sense of accountability and to increase the audit process transparency. In 2011, the PCAOB further released a proposal and proposed registered firms to disclose the names of the audit partners on Form 2 (PCAOB 2011). In 2015, the PCAOB approved the final audit partner identification requirement—Rule 3211, which requires registered public accounting firms to disclose the audit partner’s name and information on Form AP. The form needs to be filed within 35 days after the date that the auditor’s report is filed with the SEC.
Current accountability mechanisms include partner rotation, partner compensation, internal firm quality control review, peer review, potential inspection and regulatory sanction by SEC and PCAOB, and civil litigation (Basu and Shekhar 2019).
In the auditing literature, researchers have established the role of audit partner gender in determining audit outcomes. For example, Hossain et al. (2018), using Australian setting, find that female audit partners are more likely to issue going-concern audit opinions to financially distressed clients. Ittonen et al. (2013) and Garcia-Blandon et al. (2019)both find that clients of female audit partners have lower levels of discretionary accruals than clients of male audit partners. Similarly, Ittonen and Peni (2012), using a sample of companies from three Nordic countries, find that female audit partners charge higher audit fees than their male counterparts. These studies arrive at their findings after controlling for important determinants of audit quality and audit fees such as client characteristics and financial health, auditor change, the inclusion of non-audit services, auditor tenure, etc.; suggesting that the audit partner gender effect on audit outcomes is robust.
Gender socialization is a process of educating and instructing males and females as to the norms, behaviors, values, and belief of group members as men or women.
While audit delay is commonly used as a proxy for audit effort, it may potentially reflect inefficient time management, prior studies often conduct audit delay test along with audit fees test and interpret the findings jointly. If the results of both tests are consistent, we can draw a more definitive conclusion regarding audit effort.
PCAOB Auditing Standard 1301 (PCAOB 2012) requires that auditors communicate with the client's audit committee regarding matters related to an audit.
Results using OLS models are consistent with the main results.
We control for power dynamics between CFO and audit partner by including the variable CFO_POWER. CFO_POWER is calculated based on CFO pay slice—a ratio of the total compensation of the CFO scaled by the aggregated compensation of the top-five executives. This measure reflects the relative importance of the CFO as well as the extent to which the CFO is able to extract rents (Bebchuk et al. 2011; Cheng et al. 2015).
Column (2) and column (5) report the regression results without controlling audit partners’ individual characteristics (i.e., the education level, the counts of prior employers, and the number of linked connections). Column (3) and (6) report regression results after controlling theses partners’ characteristics.
Cunningham et al. (2019) do not find improvement of audit quality, proxied by the absolute value of discretionary accrual, F-Score, and incorrect material weakness measures, in the post-adoption periods. However, Burke et al. (2019) find significant improvement of audit quality, measured by absolute value of discretionary accrual, in the post adoption period.
The F-statistics of POST + POST*FEMALE, reported on the bottom of columns (2) and (3), are 5.56 (p < 0.001) and 7.16 (p < 0.001), repectively.
The F statistics of POST + POST*FEMALE in column (5) and (6) are 2.55 and 2.66 (both p < 0.001).
Column (2) shows the regression result without the partner's personal characteristics, and column (3) includes these characteristics.
The three times mandatory rotation is calculated as (2001–1987)/7 + (2016–2001)/5 = 3.
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We thank Zvi Singer, and conference participant at the 2019 AAA Audit Midyear Meeting and 2019 Southwest Region Meeting for their helpful comments and suggestions for improving this paper. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.
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Hao, J., Pham, V. & Guo, M. The Gender Effects of Audit Partners on Audit Outcomes: Evidence of Rule 3211 Adoption. J Bus Ethics (2021). https://doi.org/10.1007/s10551-020-04732-w
- Audit partner gender
- Publication of auditor identity
- Audit partner accountability
- Audit quality
- Audit fees
- Audit efforts