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 United States. 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.

A primary argument against fair value measurement is the lack of verifiability, where verifiability is defined as consensus in measurement by independent parties. We evaluate this argument by investigating trends in the consensus of reported fair values. Our findings indicate that consensus increased between 2005 and 2019, as evidenced by reductions in the fair value range and standard deviation. Further analyses suggest that enhanced data availability—driven by public dissemination of trade information—serves as a mechanism for this trend. We also document that securities subject to testing by larger external auditors with more resources to take advantage of enhanced data availability are associated with a stronger trend in increasing consensus. Finally, this trend appears to be stronger in situations when management has a heightened opportunity to record a biased estimate. While conventional arguments express concern over management’s ability to manipulate fair values, our results demonstrate patterns consistent with improved verifiability.

This study examines the audit pricing effects when auditors specialize in industries conducive to transferable audit processes. Our results indicate that industry specialists charge incrementally lower fees in industries with homogenous operations, and particularly in industries with both homogenous operations and complex accounting practices. Moreover, we discover that audit quality is no lower for clients audited by these specialists offering fee discounts, consistent with a conclusion that the reduction in fees indicates cost efficiencies rather than lower-quality audits. Further analysis indicates that the shared economies of scale only occur in a subsample of client firms with relatively high bargaining power. When considered in conjunction with prior research using a survivorship approach, our study provides evidence that certain industries lend themselves to specialization because auditors generate cost-based competitive advantages without compromising service quality. Data Availability: Data are publicly available from the sources identified in the paper.

Recruiting talent is a major issue for the accounting profession and is especially salient for small firms with limited resources and brand recognition. In this study, we examine the challenges small accounting firms face when recruiting from universities and the strategies they use to overcome them. Drawing on interviews with 34 stakeholders (primarily recruiting specialists and human resource managers), we develop a process model of small-firm recruiting and present evidence related to each phase: (1) targeting certain universities and students, (2) engaging in university recruiting activities, (3) extending offers, and (4) aiming to evaluate recruiting outcomes. Guided by theory, our findings reveal that small accounting firms develop organizational familiarity and image with students while navigating fatalism and balancing imitation and differentiation in their recruiting strategies. We conclude with a call to reconsider the “biggest is best” assumptions that dominate mainstream accounting research and provide suggestions for future research. Data Availability: Data were obtained from interviews.

Small accounting firms represent important participants in the audit market, yet details of how they operate and develop competencies remain unexplored. Small firms often join forces through accounting associations and networks (AANs), which may help them overcome significant challenges commonly faced by smaller firms. We interview 37 partners from 18 firms representing nine AANs to examine how small firms leverage their AAN membership and to understand the related implications for audit quality. Our findings indicate that small firms acquire needed resources and enhance their market legitimacy through AAN membership; however, the nature and extent to which they do so varies by AAN type. Importantly, we also find that the majority of respondents perceive AAN resources, especially access to expertise, as critical to their firms' audit quality. Our research, informed by a theoretical lens based on resource dependence and legitimacy, enriches existing auditing literature, provides a new perspective for member firms and regulators, and responds to recent calls to understand factors affecting accounting firms' competencies.

The “coopetition” paradox exists when two or more organizations are simultaneously involved in cooperative and competitive interactions. In the accounting industry, small firms encounter coopetition when they align themselves with other independent firms to form accounting associations and networks (AANs). AANs are a type of interorganizational relationship (IOR) that provide opportunities for member firms to collaborate by sharing important resources such as expertise, best practices, and manpower. However, member firms also compete in the marketplace for clients and human capital, which incentivizes uncooperative and opportunistic behavior. If managed inadequately, coopetitive tensions can significantly hamper AAN benefits and may lead to IOR failure. Given the considerable longevity of AANs, we interview 42 high‐level accounting professionals to understand AANs' apparent successful management of these tensions. Leveraging coopetition and IOR theory, our analysis suggests that transactional mechanisms (contractual agreements, organizational structure, selection/monitoring processes) and relational mechanisms (trust, social ties, reciprocity) play key roles in encouraging healthy cooperation and competition among member firms. One of our main conclusions is that these mechanisms contribute to AAN success because they are leveraged comprehensively across each IOR life cycle phase, and they are mutually reinforcing, with transactional mechanisms providing the foundation to inspire confidence and encourage the development of relational mechanisms. Our research enriches existing accounting and coopetition literature, provides a new perspective for AANs, and responds to calls to understand key factors of IOR success.

International standards encourage auditors to consider regulatory factors and external parties during the risk assessment process. One such external party is the taxation authority, which monitors corporate conduct and uses the threat of tax audits to constrain managerial opportunism. This study examines whether tax enforcement influences auditors' perception of the risk of material misstatement on their engagements. Using a sample of companies listed on European exchanges, we assess the strength of tax enforcement at the country level based on the number of full‐time equivalent (FTE) employees in the tax audit and verification function relative to the size of the economy. Since auditors of these European listed companies must publicly disclose key audit matters (KAMs), we use the number of KAMs to capture auditors' perceptions of client‐level misstatement risk. Our results indicate that auditors report fewer KAMs in the presence of more FTEs in the tax audit and verification function. In cross‐sectional tests, we find that this negative association is stronger in settings where auditors are more inclined to incorporate the monitoring potential of the tax authority into their risk assessment, such as in countries with high book‐tax conformity and for auditors with greater exposure to complex tax issues. These findings offer new insights into the role of tax enforcement in auditors' decision‐making and have timely implications for accounting regulators and academics studying the determinants of KAMs.

Oversight responsibilities for many audit committees (ACs) are evolving to include some of the hottest topics in the boardroom: enterprise risk management, cybersecurity, and environmental, social, and governance reporting. However, certain ACs avoid overseeing these evolving areas, creating significant variation across boards in the assignment of responsibilities. In this study, we seek to understand how ACs respond when environmental changes create new evolving risks that may extend the boundary of their traditional domain. To do so, we interview a diverse set of 29 AC members from U.S. publicly traded companies. We analyze our data through the theoretical lens of collaborative boundary work to identify how ACs respond by extending, blurring, or maintaining their perceived oversight boundaries, the related implications of these decisions, and their key tactics employed to manage AC workload. Our findings should be of interest to boards, investors, and regulators tasked with monitoring AC effectiveness.

We investigate changes in the quality and cost of audit services surrounding PCAOB Rule 3211, which requires disclosure of audit partner names in Form AP. To isolate changes due to Rule 3211 from other confounding factors, we use difference-in-differences analyses with separate control groups, including a group of companies that disclosed partner identities prior to Rule 3211. Our study also incorporates several measures from prior literature to proxy for various dimensions of audit quality. Evidence from the difference-in-differences analyses reveals that any immediate impact of Rule 3211 on audit quality or fees is limited to specific dimensions of audit quality, specific control groups, and/or specific company characteristics. We reach this conclusion after considering alternative research designs and evaluating confidence intervals for statistically insignificant coefficients. We caution that our findings only provide initial evidence and further research is necessary to evaluate other potential impacts of Rule 3211.