Do Smarter Auditors Have More Important Clients? Archival Evidence Based on Unique IQ Data on Swedish Auditors

Abstract

This study examines the role of an individual auditor’s cognitive ability in delivering high-quality audits and in creating value for clients. Our results from analyzing data from Sweden show that audit partners’ IQ scores obtained from psychological tests are positively related to both audit reporting accuracy and the financial reporting quality of their client firms. We moreover find that an audit partner’s IQ is associated with the audit fee premiums paid both for audit and consultancy services indicating that clients are willing to pay a premium for services of more capable audit partners. Combined, our results show that although audit services are standardized through various control mechanisms and audits are conducted by teams rather than by individual auditors, cognitive ability of audit partners responsible for the audit is still important in delivering high-quality audit services.