Reviewing a Friend - The Role of Social Ties in Review Work in Auditing

Abstract

Hierarchically structured review work is a pervasive element in many professional work settings, including auditing. However, little is known about social factors underlying the pairing of reviewers and reviewees and their impact on quality. The German auditing setting provides a unique opportunity to empirically observe review work at the highest hierarchical level. We investigate the role of social ties in the pairing of concurring auditor (reviewer) and lead auditor (reviewee). We find that the presence of social ties between the concurring auditor and the lead auditor resulting from local affinity, i.e., having the same dialect and working in the same office, makes it more likely for the auditors to form pairs. In contrast, the presence of educational affinity, i.e., having a similar level of audit experience and the same field of study, makes it less likely for auditors to form pairs. Using an instrumental variable approach to control for selection effects, we find that pairs sharing a local background provide lower audit quality, whereas pairs sharing an educational background provide higher audit quality. Our findings should be of interest to regulators, audit firms, audit clients and investors.