Can You Spell Your Audit Partner’s First Name? The Answer May Affect Earnings

An academic study that will appear in a forthcoming issue of Contemporary Accounting Research finds that audit partners with individualistic personalities are more likely to allow their clients flexibility in making accounting choices and that, as a result, the comparability of their clients’ earnings is decreased.  To measure individuality, the researchers looked at whether the partner had an uncommon first name. In Does Audit Partner Individualism Reduce Client Earnings Comparability? Evidence from the United States, Young Hong Kim (George Mason University), Yinghua Li (Arizona State University), and Dechan Wang (Texas A&M University) conclude:

“We find that two companies report less comparable earnings when one is audited by a partner with an uncommon name and the other is audited by a partner with a common name relative to two companies each audited by a partner with a common name. This finding suggests that audit partner individualism is associated with lower earnings comparability. In addition, we find that the negative relation between partner individualism and comparability is more salient for more confident audit partners and less salient under stronger regulatory monitoring by the PCAOB and the SEC and for more important clients.”

Other researchers have found that uncommon first names are a proxy for individualism because people with uncommon names are more likely to view themselves as independent and self-reliant, and to prefer personal freedom over regulations and social norms.  Based on that prior research, Professors Kim, Li, and Wang define an individualistic audit partner as one with a first name outside the national top 50 frequent first names (by gender) in Social Security Administration data from 1950 through 1990.  The authors state that individualism “cultivates independence, autonomy, freedom of action, self-fulfillment, and rights over duties” and that partners with uncommon first names are less likely to follow rules and more likely to trust their judgment.

“Thus, we conjecture that, when interpreting firm-wide policies, individualistic audit partners tend to rely more on their own judgment and expertise rather than seeking consensus or strictly adhering to rules. As such, we hypothesize that individualistic audit partners are more likely to prioritize their personal interpretation of GAAP and generally accepted auditing standards (GAAS), leading to deviations from firm-wide internal working rules and lowering the earnings comparability of their clients relative to those of non-individualistic peers.”

The study also identified factors that may amplify or mitigate the effects of partner individualism.  For example, regulatory monitoring, as measured by PCAOB “inspection intensity” or the receipt of an SEC comment letter, reduces the effect of partner individualism on earnings comparability. In addition, partner individualism has less impact on earnings comparability in audits of important clients, since more audit staff and other partners are likely to be involved, and “individualistic partners are more constrained from deviating from internal working rules.”