The effect of gender composition in joint audits on earnings management

Abstract

PurposeThis paper aims to examine the association between gender composition of joint auditor pairs and the quality of reported financial information. More specifically, the authors attempt to assess whether and how these gender compositions affect the client firms’ earnings management behavior.Design/methodology/approachThe authors utilized the unique institutional setting of Taiwan, where joint auditors are required by law. They studied the effect of gender in joint auditor pairs on accrual earnings management and real earnings management to achieve financial reporting objectives.FindingsEmpirical results indicate that engaging a woman as the lead auditor can constrain accrual earnings management, regardless of whether the joint auditor is male or female. The authors also found that all-male signing auditor pairs with industry expertise can significantly reduce accrual earnings management. The authors also documented that all-female signing auditor pairs and auditor industry expertise could drive clients to engage in real earnings management activities as an alternative to accrual earnings management.Originality/valueThe empirical results demonstrate that gender indeed plays a role in the quality of client’s reported financial information. Female auditors in a lead position and male auditors with industry expertise tend to be more successful in delivering better-quality audits.