Researchers Determine That Big 4 Audit Partners Not Named Michael or Jennifer Are More Likely to Bend the Rules

Here at Going Concern we love academic research, even the kind that makes your eyes start watering with its tedious and unforgiving nerdiness. Today we’ve found one for you that’s a bit less dorky and more interesting, or so we hope. And I’m not just saying that because it’s about people with uncommon first names of which I am one (trust I’ll find a way to make this about me at some point in this article regardless).

According to a recent paper in Contemporary Accounting Research, auditors with “uncommon” names are more likely to allow bending of audit standards. That’s not to say these engagement partners are outright committing audit sins, to be clear.

First, the abstract:

We examine whether audit partner individualism reduces earnings comparability in the United States. We argue that individualistic audit partners are more likely to deviate from internal working rules and allow clients more flexibility in making accounting choices, consequently decreasing their clients’ earnings comparability. Using a novel partner-level measure of individualism, we find that within individual Big 4 audit firms, earnings are less comparable between a company audited by an individualistic partner and a company audited by a non-individualistic partner, relative to a pair of companies that are each audited by a non-individualistic partner. Our inferences are robust to a changes analysis, a falsification test, and a propensity score matching procedure. We also find that the effect of partner individualism is less salient when the audit firm is under more stringent regulatory monitoring and when clients are more important, but more salient when individualistic partners are more confident about being different. Further analyses suggest that our main inferences are robust to controlling for differences in partners’ cultural backgrounds and using client-pairs audited by the same audit partner. Collectively, our study provides novel evidence on the role of auditor individualism in earnings comparability.

TLDR: They crunched the data and determined audit partners who didn’t go to school with a dozen people who also have their name tend to be more “individualistic.”

Phys.org discusses the paper titled “Does audit partner individualism reduce client earnings comparability?” authored by Young Hoon Kim, assistant professor of accounting at the Donald G. Costello College of Business at George Mason University and co-authored by Yinghua Li of Arizona State University and Dechun Wang of Texas A&M University:

The researchers analyzed filings from 2,829 publicly traded companies over the period 2016–2020. They classified the first names of the associated audit partners as either common or uncommon, depending on whether the names were among the 50 most frequent first names by gender as per the Social Security Administration database.

Comparing filings from otherwise similar companies, the researchers concluded that financial reports audited by uncommonly named auditors exhibited up to 8.3% more deviation than those done by their commonly named counterparts.

Phys.org continues:

Why is this issue worth looking into? Kim highlights that earnings comparability—that is to say, consistent application of reporting standards across filings—is generally seen as a good thing for market efficiency. That rule of thumb could lead one to conclude that individualistic auditors, including those with non-standard first names, are a liability for the Big 4. But the reality is much more complicated, Kim says.

“In many cases, better comparability is a good thing. But truthful representation is more important. And we do not find that individualistic auditors produce low-quality outcomes.”

He also references another study that found auditors with a history of speeding tickets “were more aggressive in auditing and therefore quality deteriorated.” I think he means this one that found 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.

To better understand the names the researchers consider common I headed to the Social Security database and arbitrarily picked 1975 to get a list of the top 20 most popular baby names that year as 50 seems like a good age to check. Feel free to check yourself using any year you like.

By comparison, my name ranked 170 the year I was born. It peaked in popularity in 1983 with 2,078 total births, 0.116 percent of all female births in the United States that year. So that totally explains why I can count the number of Adriennes I’ve met over my lifetime on one hand.

What does this mean for capital markets when all the Jaxxons and Ayshleighs born last decade are old enough to be engagement partners?