Audit Partners’ Risk Tolerance and the Impact on Audit Quality

Relying on their history of legal infractions to measure individuals’ risk tolerance, we examine the impact of engagement partners’ risk appetites on audit quality in the U.S. Criminology and economics research links criminal activity with enduring personality traits that capture an individual’s tolerance for risk. Consistent with expectations, we document that partners known to engage in risky behaviors conduct lower quality audits. More specifically, we find that clients of more risk-tolerant partners exhibit greater propensity to misstate and less timely loss recognition, while also paying lower audit fees. This evidence is robust to several alternative research design specifications, including propensity score matching techniques and additional measures of partner risk tolerance. Reflecting that the Big 4 audit firms have more robust quality control systems, more standardized audit procedures, larger audit teams that potentially narrow the scope for engagement partner characteristics to matter, and more valuable reputations to protect, we generally find that the Big 4 better constrain risk-tolerant partners from undermining audit quality. Collectively, our analysis contributes to emerging research on the role that individual audit partner characteristics play in shaping audit outcomes.