This study analyzes the relation between auditors' perceived business risk and audit fees to determine whether audit firms or their clients bear the expected legal costs of business risk. We predict that hourly audit fees and the number of audit hours are increasing in business risk. Using confidential survey data collected by a large international accounting firm for 422 audits, we find that high business risk increases the number of audit hours, but not the fee per hour. This implies that firms perceive firm‐level differences in business risk and obtain compensation through billing additional hours, not by raising the hourly charge.

The engagement quality review is a key component of an audit firm's quality control system. This study leverages unique data on individual engagement quality reviewers (EQRs) to examine how previous shared working experience between EQRs and engagement partners affects audit quality. While prior research suggests that within‐firm network ties between predecessor and successor partners facilitate knowledge transfer, we find that prior shared working experience between EQRs and engagement partners is associated with lower audit quality. Mechanism tests indicate that such experience is associated with a higher likelihood of regulatory enforcement actions related to deficiencies in audit procedures, insufficient evidence, and a lack of professional skepticism. We also find that such experience corresponds with higher materiality thresholds, suggesting reduced scrutiny during audit planning and execution. Additional analyses reveal that these adverse effects primarily arise when previous shared working relationships did not produce adverse outcomes, when EQRs are not audit industry leaders, and when they face lower reputational risk. These findings are especially salient given that EQRs’ previous shared working experience with engagement partners appears to weigh heavily in EQR assignments. Overall, our study provides important insights into the implications of EQR independence and the determinants of engagement quality review effectiveness.

We investigate the monitoring quality of accountants with ties to the Mafia in their role as auditors for “clean” firms—those with no known ties to organized crime. Using a proprietary government database, we identify Italian firms with alleged ties to the Mafia through their executives, directors, or shareholders. We define “suspect accountants” as those who serve as auditors for these Mafia‐connected firms, acknowledging their potential associations with criminal entities. We predict and find evidence that “clean” clients (treatment group) monitored by suspect accountants are more likely to engage in earnings management practices that reduce taxable income, compared with a control sample of “clean” firms monitored by accountants with no known Mafia ties (control group). Our findings suggest that accountants with ties to the Mafia act as low‐quality monitors in the “clean” economy.

There is a debate in the literature as to whether employee selection is a substitute or complement to incentive contracting. We argue that incentive contracts and selection can be both complements and substitutes conditional on the contracting difficulty faced by the firm. We examine these control choices in a setting where contracting difficulties arise due to the firm's choice of strategy and from the volatility created by the firm's external environment. We select a firm's commitment to organizational learning (OL) as our strategic choice variable as this provides a useful proxy for identifying settings where explicit incentive contracting is difficult. The results show that, as firms become increasingly committed to OL, incentive contracts and employee selection operate as complements. However, with a high commitment to OL and an increasing level of external volatility, contracting on performance measures will become less effective. In this context, our results indicate that there is a substitution effect toward employee selection.

We investigate ethnic minority and nonminority sell‐side analysts’ participation in public earnings conference calls. We find that minority analysts are underrepresented in conference call Q&A sessions, and minority analysts who do participate on the calls experience lower levels of prioritization than do nonminority analysts. Minority analysts’ lower participation rates are partially but not fully mediated by characteristics such as experience, work environment, and stock rating favorability. Additionally, firm and conference call fixed effects mediate approximately half the magnitude of lower minority participation rates. Extroverted minority analysts participate at higher rates, but the negative association between minority status and conference call participation is exacerbated when calls are more time constrained, when executive teams are less diverse, and when analysts are from less prestigious brokerage houses. Overall, we document the underrepresentation of minority analysts on earnings conference calls and provide evidence suggesting both analysts’ and managers’ choices influence minority analysts’ participation rates.

Formal theory and empirical research are complementary in building and advancing the body of knowledge in accounting in order to understand real‐world phenomena. We offer thoughts on opportunities for empiricists and theorists to collaborate, build on each other's work, and iterate over models and data to make progress. For empiricists, we see room for more descriptive work, more experimental work on testing formal theories, and more work on quantifying theoretical parameters. For theorists, we see room for theories explicitly tied to descriptive evidence, new theories on individuals' decision making in a data‐rich world, theories focused on accounting institutions and measurement issues, and richer theories for guiding empirical work and providing practical insights. We also encourage explicitly combining formal theory and empirical models by having both in one paper and by structural estimation.

We examine how similarity in institutional, legal, and social characteristics between a firm's and its directors’ home countries, that is, country‐pair homophily, affects foreign director appointments. We estimate a gravity model that includes economic and geographic proximity and find that country‐pair homophily is a significant determinant of foreign director appointments to corporate boards. We also find that country‐pair homophily limits the appointments of foreign directors from high‐quality governance countries to firms located in low‐quality governance countries, which may reduce the role of board internationalization in promoting the global convergence of governance practices. We analyze changes in foreign director appointments around the international adoption of IFRS and Norway's gender‐quota rule and find a higher appointment likelihood for directors originating from countries that are institutionally and culturally similar to that of the firm. Our findings point to the critical role that country‐pair homophily plays in matching director to boards with implications for the diffusion of governance practices globally.

Audit firms are investing billions of dollars to develop artificial intelligence (AI) systems that will help auditors execute challenging tasks (e.g., evaluating complex estimates). Although firms assume AI will enhance audit quality, a growing body of research documents that individuals often exhibit “algorithm aversion”—the tendency to discount computer‐based advice more heavily than human advice, although the advice is identical otherwise. Therefore, we conduct an experiment to examine how algorithm aversion manifests in auditor judgments. Consistent with theory, we find that auditors receiving contradictory evidence from their firm's AI system (instead of a human specialist) propose smaller adjustments to management's complex estimates, particularly when management develops their estimates using relatively objective (vs. subjective) inputs. Our findings suggest auditor susceptibility to algorithm aversion could prove costly for the profession and financial statements users.