For a Good Audit, You Need to Select the Right Team

AFTER LOOKING AT AUDITING FIRMS, ACADEMIC LITERATURE NOW FOCUSES ON OFFICES AND INDIVIDUALS, SHOWING THAT KNOWING HOW TO COMBINE DIFFERENT SKILLS AND PROFILES WITHIN THE GROUP IMPROVES THE QUALITY OF AUDITS

by Angelo Ditillo and Angela Pettinicchio, Dept. of Accounting, Bocconi
Translated by Alex Foti


Financial reporting plays a decisive role in ensuring the efficient functioning of capital markets, as it is a staple of the decision-making process of investors and stakeholders, which is aimed at optimizing the allocation of savings.

The accounting scandals that have swept international markets since the year 2000 are testament to the presence of information asymmetry between companies and markets that arises from incomplete and misleading financial communication, and that can generate devastating economic impacts. For this reason, international legislators and academic researchers have focused their attention on the role of auditors as subjects capable of expressing independent judgment on the reliability of corporate information released to the market. The purpose is to study potential tools that can improve the quality and transparency of companies’ balance sheets.

While academic literature focused on auditing firms at first, in order to determine which of their characteristics could positively influence the quality of the auditing services provided (for instance, consultancy size), over the last decade the level of analysis has gotten more specific, focusing on key offices and, finally, on individual auditors. In this regard, it was demonstrated how the demographic characteristics of signatory partners, above all their gender, can have a decisive impact on the quality of the audit provided (and, therefore, indirectly, on the quality of financial information disclosed by the client company). It should be considered, however, that the individual auditors do not operate in isolation, since their work is by necessity influenced by the interactions and social dynamics that are established at the level of work teams.

In a recent paper co-written with Mara Cameran, published in European Accounting Review in 2018, we have uncovered which key features of auditing teams have a positive impact on the quality and efficiency of company audits. In particular, the data show that a higher percentage of work hours of partners and managers assigned to an audit in the early stages of the consulting relationship has a negative impact on the quality of the audit, while this effect becomes positive as the duration of the relationship with the client company increases. This result can be explained by considering that a higher number of hours assigned to partners and managers corresponds, in relative terms, to a lower number of hours assigned to seniors and staff, which actually carry out most of the technical work. And the focus on technical aspects is of particular importance in the early stages of the assignment, as it is necessary to deepen knowledge of the client being audited. In addition to this, the diversity of partners and managers in terms of training and gender in the work team has a positive impact on the quality and efficiency of the auditing of financial statements.
 
The results are primarily relevant for auditing companies in terms of their personnel selection policies and organization of their auditing activities. Furthermore, they have implications for the international bodies which set auditing and accounting standards and in the last few years have underlined the importance of the characteristics of auditing teams for the quality of financial reporting. This could lead to the definition of standards for the selection of individuals that are assigned to the various auditing tasks, in order to increase the quality of external audits on companies’ accounts.