The Effects of Straddling: Evidence From Audit Partners Auditing Both Public Companies and Nonprofit Organizations

Abstract

Recent research in other disciplines suggests that range (i.e., a broad base of experience in more than one domain) may lead to higher performance under certain conditions. We apply this idea in the context of auditing, examining how audit partner range impacts audit outcomes and how industry overlap might moderate those effects in the setting of public company and nonprofit organization audits. Specifically, we consider audit partners straddling these two economic sectors, i.e. auditing clients in both sectors, as they are subject to a variety of auditing standards and regulatory regimes. Approximately six (ten) percent of individual partners conducting public company (nonprofit organization) audits are “straddlers.” Analyzing audit outcomes from 2015 to 2018, we find that overall, straddling has a negative impact on audit outcomes as measured by restatements for public company clients, material weakness reporting for nonprofit clients, and audit report lag for all clients. However, for public companies, we find that straddling clients within the same industry improves restatement likelihood and going concern reporting while moderating the negative effect of straddling on audit report lag. In nonprofit audits, the negative effects of straddling are exacerbated in going concern reporting with industry overlap but moderated in internal control reporting and audit report lag. These findings extend our understanding of the role of audit partner experience across economic sectors and auditing standards.