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2019E01 – What makes audit partners and their engagement teams successful?

Project Number – 2019E01

2019E01 – What makes audit partners and their engagement teams successful?

What?

What?

The research objective was to understand the primary factors that made audit partners, management, and their engagement teams successful in terms of the quality of their teamwork and engagement outcomes. One major goal of this research project was to answer this fundamental question: what was it about audit partners and managers that mattered? For this, the project focused on audit partner and manager personality and leadership styles, their dyadic fit, and team dynamics and climate – all in regard to audit quality.

Why?

In terms of audit practice, the contribution of this study was to provide a scientific basis for organizing and managing audit teams in order to further enhance audit team performance and quality. This analysis was intended to help develop more targeted responses to managing audit team leadership composition, achieving better and consistent audit outcomes, and improving the internal dynamics of audit teams (how teams worked).

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Audit Externalities and Regulation

In his paper on regulation, Jere Francis explains why audits are regulated. Audits are regulated because the major parties (auditors and their clients) settle for lower levels of assurance. Society requires higher levels of assurance since they (e.g., future shareholders, banks, employees, customers) benefit from higher levels of assurance. Legislation and regulation purportedly motivate auditors to set higher levels of assurance (and thus audit quality). However, since auditors are required to produce on average a higher level of quality audit than the market requires, and arguably incur higher costs than the client is willing to pay, the question is who foots the bill for the higher cost: the auditor, the client, future shareholders, banks, society as a whole? Read Jere’s insightful paper. It is important to understand why under the current system there will always be tension between what the firms believe is an appropriate level of assurance versus what auditors are expected to deliver.

When Dual Team Leaders Model Voice Behavior: Boundary Effects of Involvement, Mixed Messages, and Stifling Hierarchy on Team Safety, Voice Climate, and Performance

What leaders can do to help team members feel safe enough to create a climate of voice in a dual-leader: The manager plays a key role in the team: voice-modeling behavior from the manager has a stronger association than the partner’s behavior. Need for leadership training to help managers demonstrate, through their own “voice” leadership behaviors, that there is an environment of psychological safety that enables voice for the audit team. Managers’ influence is accentuated when they are more involved and avoid mixed messaging (by not engaging in counterproductive RAQ acts). Partner’s voice role modeling may help in absence of the manager, but otherwise has a stifling effect (less actual team voice). More manager involvement cannot compensate for this.

Accountant Article Jere Francis

As a knowledgeable non-European, the American professor Jere Francis can provide a relatively objective view on the current developments in the field of auditing in The Netherlands: ‘I think, that if there is a structural deficit, it is not in the organizational aspect of the audit firms, rather than in the limits of the investigative tools of the auditors’.

Partner-Manager Voice Modeling Behavior, and the Effects of Mixed Messages on Audit Teams

Team science research in the organizational behavior (OB) literature shows that successful teams must elicit “voice” from its members, i.e., the willingness to speak up and share information with the team. We propose a framework that recognizes when leaders exhibit their own “voice” behaviors, it creates psychological safety for the team – i.e., it allows team members to feel safe and encouraged to speak up about important audit matters. Analysis of data from 127 audit engagement teams with 754 auditors indicates the following. First, there is a positive and dominant effect on an audit team’s psychological safety (and ultimately on team voice climate and team performance) when managers engage in voice role modeling behavior. However, when the manager is also seen to engage in negative counterproductive behaviors, such as taking “short cuts” during the audit, the positive effects of his / her voice modeling behaviors are lost. This finding shows the importance of avoiding “mixed messages” from the manager, as this leads audit team members to question whether it is safe to speak up. Second, our findings reveal that when the partner and manger differ in emphasizing voice behaviors (one high, one low), these mixed (inconsistent) messages did not diminish perceived team psychological safety. Thus, if at least one leader (either the partner or the manager) is enacting high levels of voice role modeling behavior, the team still has high psychological safety and team voice climate. The results emphasize the need for leadership training to help partners and managers demonstrate, through their own “voice” leadership behaviors, that there is an environment of psychological safety that enables voice for the audit team. However inconsistent signals from team leaders can potentially compromise the team’s sense of psychological safety.

It Takes Two to Make a Team Go Right

Today’s teams often have two formal leaders (i.e., dual leaders), yet research has almost exclusively examined the effects of a single, higher-level team leader’s behaviors on team members and team outcomes. This is problematic because these findings cannot unequivocally be applied to guide the use of dual-leader team structures. Using 93 professional service (i.e., audit) action teams, we examine effects of partner (i.e., external) and manager (i.e., internal) leaders simultaneously exhibiting initiating structure and individualized consideration leadership behaviors on team efficacy and, ultimately, team performance and team viability. Our findings show that the total capacity of leadership effects for a team with two leaders is only captured after considering the influence from both leaders simultaneously, especially when examining interactive effects between an individual leader’s behaviors and across two leaders’ behaviors. We find team efficacy is strengthened when the partner alone exhibits both higher structure and consideration, which is further augmented when the manager also exhibits higher consideration simultaneously. Thus, we find dual-leader interactions demonstrating the “Power of the Partner” and “Power of Consideration” effects are critical for building team efficacy, and in turn, team performance and team viability in dual-leader structures, revealing the existence of meaningful leadership interactions that cannot be found in single-leader studies.

Audit Externalities and Regulation

In his paper on regulation, Jere Francis explains why audits are regulated. Audits are regulated because the major parties (auditors and their clients) settle for lower levels of assurance. Society requires higher levels of assurance since they (e.g., future shareholders, banks, employees, customers) benefit from higher levels of assurance. Legislation and regulation purportedly motivate auditors to set higher levels of assurance (and thus audit quality). However, since auditors are required to produce on average a higher level of quality audit than the market requires, and arguably incur higher costs than the client is willing to pay, the question is who foots the bill for the higher cost: the auditor, the client, future shareholders, banks, society as a whole? Read Jere’s insightful paper,. It is important to understand why under the current system there will always be tension between what the firms believe is an appropriate level of assurance versus what auditors are expected to deliver.

Francis Voice Modeling Behaviour (Slider)

Important take-away: managers and partners need to be trained in how to effectively demonstrate that they have a genuine commitment to psychological safety and a strong climate for team voice.

What Exactly Do We Mean by Audit Quality?

The concept of audit quality is of fundamental importance in auditing, but there is little agreement on its definition or measurement. Jere Francis reviews several approaches to understanding audit quality and argue that the most meaningful measure is based on what the auditor is legally required to do, which is to opine on the client’s financial statements. This has resulted in a black and white (pass/fail) binary model of the audit report. However, we know there is a continuum of quality in the audited financial statements of clients, and that much of this variation is the result of the client’s accounting policy choices and estimations. Yet most firms receive a standard clean opinion despite the wide variation in financial statement quality. Jere Francis argues that while it is important for auditors to follow procedural rules (standards) to gather sufficient evidence, it is equally important that auditors carefully monitor and constrain, where necessary, a client’s aggressive accounting policy choices and estimates. The logical consequence is that the quality of audited financial statements and the quality of the audit report are related, and both are continuums, fifty shades of grey. Thus, audit report quality is better understood as a spectrum rather than a binary pass/fail model. Going forward, the challenge is to find ways for an auditor to convey information about the quality of audited earnings that go beyond the binary model of the current audit report.

Leadership behaviors by partners and managers, and audit team performance

Leadership research in the organizational behavior (OB) literature has generally focused on single-leader teams. Yet many organization, including audit firms, have more complex dual leader structures in which leadership duties are shared between two team leaders. We study this in the context of audit teams in which the dual leaders are the audit partner and the audit manager. We find some evidence that division of labor in leadership behaviors is effective. However, the most effective audit teams are those in which both the partner and manager have what are called “consideration” behaviors that exhibit a concern for the welfare of team members. We call this “the power of consideration.” This finding makes sense given that audit teams come together for short periods of time, and there is a need for the audit team to feel confident in order to be effective. The other condition in which audit teams perform well is when the partner exhibits strong leadership behaviors for both initiating structure (defining goals, communication channels, time-lines) and consideration, irrespective of the manager’s leadership behaviors. We call this the “super partner” effect. Overall, the results point to active engagement by partners and managers with the audit team as being the most effective leadership behaviors. While initiating structure behaviors are important, consideration behaviors are far more important in audit teams, a finding which differs from prior OB research. Finally, the results underscore the importance of training partners and managers in the effective use of consideration behaviors to build team confidence and to ensure the best audit team performance.

Does Personality Relate to Job Performance of Audit Partners and Managers?

We investigate if personality traits are associated with the skills and job performance of experienced auditors. Based on survey and internal audit firm data from 1,600 Dutch auditors from the Big 4 and six mid-sized audit firms, we first provide descriptive evidence of significant variation in auditors’ personality traits. Personality traits vary between Big 4 and non-Big 4 auditors, and auditors become increasingly homogenous in higher function levels. Next, we find that personality traits predict distinct skills (commercial, technical, and leadership) that are part of the auditor’s job. The tension that exists between the commercial and technical aspects of the audit is also reflected in opposing personality profiles that are beneficial for each of the skills. Finally, audit firm assessments of job performance are associated with personality, both directly, and indirectly through their effect on skills. Collectively, these results contribute to our limited understanding of personal characteristics and auditor performance.

Audit Partner-Manager Dyadic Fit and Audit Team Functioning

This paper investigates the formation of audit partner-manager pairings (dyads) and the consequences of this formation on the functioning of the engagement team. Prior literature mainly focuses on the role of one leader alone, while in practice, an audit team is usually led by two key figures. This dual-leadership structure and its potential effect on the team are largely unexplored. We draw on the theory of homophily to develop predictions, and test them using data from 221 engagement teams and their leaders. The analyses suggest that partners and managers that form a dyad are more similar in terms of their skills and leadership behavior than other random matches based on the available pool of auditors. However, the similarity is not necessarily beneficial for the functioning of the engagement team. Only when the partner and manager are both highly skilled and demonstrate strong leadership does the similarity result in a better functioning team. Otherwise, a complementary match is associated with better team dynamics. The findings on the role of partner-manager dyads in guiding an engagement team can inform audit firms on how to better compose and manage their audit teams.

Audit Partner-Manager Dyadic Fit and Team Functioning

This study investigates the formation of audit partner-manager pairings (called dyads) on audit engagements, and the consequences of this dyad formation on the functioning of the engagement team. Prior studies mainly focus on the role of a single team leader, while in practice, an audit team is usually led by two senior individuals, the manager and the engagement partner. This dual-leadership structure and its potential effect on the team are largely unexplored topics. We draw on the theory of homophily to develop and test predictions using data from 221 Dutch engagement teams. The analyses suggest that partners and managers that form a dyad are more similar in terms of their skills and leadership behaviors than would be the case for randomly matched partners and managers. However, dyad similarity is not always beneficial for the functioning of the engagement team. In fact, dyad similarity generally has a negative effect on team climate and team performance. The exception is when the partner and manager are both highly skilled and demonstrate strong leadership behaviors. Otherwise, a complementary matching of skills and leadership behaviors of the partner and manager is superior and leads to better team climate and team performance. Team performance is self-assessed: how well the audit engagement team performed. Team climate is measured as the team’s assessment of psychological safety, team commitment, and team identity. Our findings on partner-manager dyads can inform audit firms on how to better assign and manage their audit teams, particularly since the audit partner chooses the manager most of the time (68 percent of the engagements in our study)

What Exactly Do We Mean by Audit Quality?

The concept of “audit quality” is of fundamental importance in auditing but there is little agreement on its definition or measurement. Jere Francis reviews several approaches to understanding audit quality and argue that the most meaningful measure of audit quality is based on what the auditor is legally required to do, which is to “opine” on the client’s financial statements. This has resulted in a black and white binary (pass/fail) model of the audit report. However, we know there is a continuum of quality in the audited financial statements of clients, and that much of this variation is the result of the client’s accounting policy choices, particularly accrual estimations. Yet most firms receive a standard clean opinion despite the wide variation in financial statement quality. He argues that while it is important for auditors to follow procedural rules (standards) to gather sufficient evidence, it is equally important that auditors carefully monitor and constrain, where necessary, the client’s accounting policy choices and accrual estimates. The logical consequence is that the quality of audited financial statements and the quality of the audit report are both continuums, fifty shades of grey. Thus, audit report quality is better understood as a spectrum rather than a simple binary pass/fail model. Going forward, the challenge is to find ways for an auditor to convey information about the quality of audited earnings that go beyond the binary model of the current audit report.

Does Personality Relate to Job Performance of Partners and Managers?

Recent audit partner research finds that variation in partner characteristics affects the quality of audit engagements. Most of this research uses publicly available data on partner demographics such as age, gender, experience, industry expertise, and workload (busyness). In contrast, our study uses validated survey instruments to measure the personality traits of Dutch audit partners and managers. Contrary to what one might think, there is wide variation in the personality traits of auditors – they’re not homogenous. The organizational behavior (OB) literature documents the importance of personality in explaining job performance. Consistent with the OB literature, we find that personality traits do have a significant association with the job performance of audit partners and managers, as assessed by audit firms in their annual performance reviews. There are direct effects of some personality traits on performance such as “extraversion” which is positively associated with performance. There are also indirect effects on performance in which personality traits affect job skills (technical, commercial, leadership) and these job skills, in turn, affect job performance. The study has implications for hiring, and for targeted training to better manage the effects of diverse personality traits among auditors. Finally, there are implications for diversity. As people move from manager to partner, there is a narrowing of personality traits, and extroverted individuals are more likely to be rewarded and promoted to partner. Yet firms say they want diversity in their firms, and we argue that personality traits are an important dimension of diversity that firms need to explicitly manage.

Does Distance Matter? An Investigation of Partners who Audit Distant Clients and the Effects on Audit Quality in Dutch

Evidence suggests that clients have greater discretion over reporting when partners are more distant, and this discretion results in lower quality (audited) earnings.

Does Distance Matter? An Investigation of Partners who Audit Distant Clients and the Effects on Audit Quality in English

Evidence suggests that clients have greater discretion over reporting when partners are more distant, and this discretion results in lower quality (audited) earnings. English version

November 11, 2022

FARview with Lena Pieper

The broad research question of het PhD-study is ‘what makes audit partners and their teams successful?’ In the podcast, Lena clarifies the importance of the audit…

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Project info

Project Lead

Prof. dr. Jere Francis

Research team

Prof. dr. Ann Vanstraelen

Prof. dr. Olof Bik, RA

Prof. dr. Murray Barrick

Prof. dr. Jere Francis

Involved University

Maastricht University | Nyenrode Business University | University of Amsterdam (UvA) | University of Illinois

Theme(s)

Audit Firm Culture and Organizational Learning

Project Number – 2019E01

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