The Importance of Audit Partners’ Risk Tolerance to Audit Quality

62 Pages Posted: 8 Jan 2019 Last revised: 3 Jan 2024

See all articles by Jeffrey Pittman

Jeffrey Pittman

Memorial University ; Virginia Tech

Sarah E. Stein

Virginia Tech

Delia F. Valentine

University of Wisconsin - Milwaukee

Multiple version iconThere are 2 versions of this paper

Date Written: August 7, 2023

Abstract

Relying on their history of legal infractions to measure individuals’ risk tolerance, we examine the association between engagement partners’ risk appetites and audit quality in the U.S. Criminology and economics research links infraction activity with enduring personality traits that capture an individual’s risk tolerance. Our evidence supports the prediction that partners known to engage in risky off-the-job behaviors conduct lower quality audits. Specifically, we find that clients of partners with prior legal infractions exhibit a higher likelihood of material misstatements revealed through subsequent restatements, greater propensity to misstate based on the F-score, more instances of “missed” material weaknesses, and less timely loss recognition, while also paying lower audit fees. In cross-sectional results consistent with expectations, we generally find that the impact of partners’ risk tolerance on audit quality is more heavily concentrated in clients of non-Big 4 firms and offices without industry expertise. Collectively, our analysis contributes to emerging research on the role that individual partner characteristics play in shaping audit outcomes.

Keywords: audit partner, audit quality, risk tolerance, legal infractions

JEL Classification: M40, M42, K42

Suggested Citation

Pittman, Jeffrey A. and Stein, Sarah E. and Valentine, Delia F., The Importance of Audit Partners’ Risk Tolerance to Audit Quality (August 7, 2023). Contemporary Accounting Research 40 (4): 2512-2546 (2023), Available at SSRN: https://ssrn.com/abstract=3311682 or http://dx.doi.org/10.2139/ssrn.3311682

Jeffrey A. Pittman

Memorial University ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Virginia Tech ( email )

United States

Sarah E. Stein (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

Delia F. Valentine

University of Wisconsin - Milwaukee ( email )

3202 N Maryland Ave
Milwaukee, WI 53202
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,800
Abstract Views
6,842
Rank
17,619
PlumX Metrics