The effect of audit partner gender on modified audit opinions

• Published date: 01 November 2018
• Author: Mervi Niskanen,Jyrki Niskanen,Jukka Karjalainen
• Date: 01 November 2018
• DOI: http://doi.org/10.1111/ijau.12130

ORIGINAL ARTICLE

The effect of audit partner gender on modified audit opinions

Jukka Karjalainen |Mervi Niskanen |Jyrki Niskanen

University of Eastern Finland, Kuopio, Finland

Correspondence

Jukka Karjalainen, University of Eastern

Finland, Business School, Kuopio Campus,

P.O. Box 1627, FI‐70211 Kuopio, Finland.

Email: jukka.karjalainen@uef.fi

Funding information

Academy of Finland, Grant/Award Number:

258105

We examine the effect of audit partner gender on the likelihood of issuing a modified

audit opinion (MAO) across conditions in which the issuance of an MAO is warranted

and/or that create incentives to report opportunistically at the audit‐partner level. We

find that, after an audit partner switch, female audit partners are more likely to issue

first‐time MAOs and MAOs generally and that female audit partners are more persis-

tent in issuing MAOs. However, after correcting for self‐selection bias, we do not find

an effect on the part of audit partner gender on the likelihood of issuing an MAO in

the case of partner‐level opinion shopping, subsequently failing firms, or firms that

are economically important at the audit‐partner level. This stands in contrast with

the previous evidence regarding the effect of audit partner gender on going‐concern

reporting. Overall, our study provides new evidence regarding the conditions that

induce female audit partners to report more conservatively compared with male audit

partners. The results imply that female audit partners report more conservatively if an

MAO was issued in the previous year and if the audit partner has been switched.

KEYWORDS

audit quality, audit report, auditor choice, independence, psychological characteristics

1|INTRODUCTION

Recently, a growing body of literature has emerged that aims to

enhance our understanding of the effect of gender on financial

reporting and audit quality (e.g., Francis, Hasan, Park, & Wu, 2015;

Hardies, Breesch, & Branson, 2016; Hossain, Chapple, & Monroe,

2016; Ittonen, Vähämaa, & Vähämaa, 2013). The psychological litera-

ture suggests that women are generally more risk averse than men

are and, under certain conditions, behave more ethically than men

(Byrnes, Miller, & Schafer, 1999; O'Fallon & Butterfield, 2005). In addi-

tion, evidence from experimental studies suggests that these behav-

ioral differences exist between female and male auditors and affect

auditors' decision‐making (e.g., Bernardi & Arnold, 1997; Shaub,

1994). More recent studies have utilized archival data to link the gen-

der of the audit engagement partner (hereafter referred to as the audit

partner) to audit‐related outcomes and measures of audit quality. For

instance, studies on earnings management imply that audit quality is

higher in the case of female audit partners. Specifically, these studies

report that audits by female audit partners are associated with higher

levels of income‐decreasing earnings management and lower levels of

cosmetic earnings management among private firms (Niskanen,

Karjalainen, Karjalainen, & Niskanen, 2012; Niskanen, Karjalainen,

Niskanen, & Karjalainen, 2011), as well as with higher quality accruals

among public firms (Ittonen et al., 2013).

However, the previous studies on the effect of audit partner gen-

der on auditor reporting focus on going‐concern reporting for finan-

cially distressed firms and provide mixed evidence. Examining

financially distressed Belgian private firms, Hardies et al. (2016) find

that female audit partners are more likely to issue a going‐concern

opinion (GCO). They also find that partner‐level client importance

more greatly decreases the likelihood of male audit partners issuing

a GCO. By examining the setting of Taiwanese public firms, which

are required to appoint two signing audit partners, Chin and Chi

(2008) find that the likelihood of issuing a GCO is higher only if both

audit partners are female. However, contrary to these findings,

Hossain et al. (2016) find that female audit partners are less likely to

issue GCOs for financially distressed Australian public firms. Given

the conflicting evidence, the question whether audit partner gender

affects the likelihood of issuing a modified audit opinion (MAO) given

conditions that warrant the issuance of an MAO and/or that create

incentives at the audit‐partner level to opportunistically refrain from

issuing an MAO requires further examination. In this study, we

Received: 11 April 2017 Revised: 9 February 2018 Accepted: 8 June 2018

DOI: 10.1111/ijau.12130

Int J Audit. 2018;22:449–463. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/ijau 449