Exploring behavioral economics in archival auditing research

This doctoral dissertation comprises an introduction and three self-contained essays that, using archival data, examine the role of innate personality traits, reputation concerns, and compensation incentives in shaping the judgment and behavior of individual auditors. The first essay investigates the relationship between the inherent characteristics of audit partners and audit quality. Drawing on political psychology literature, it argues that individuals' political activism reflects their extraversion and openness to experience. Using data on political campaign contributions in the United States, the study finds a consistent positive association between audit partners’ extraversion and openness to experience, as indicated by their political contributions, and various aspects of audit quality. These findings underscore the significance of considering individual differences in the recruitment and training processes within audit firms. The second essay explores the influence of reputation concerns on auditor behavior. It hypothesizes that the identification of individual engagement partners in the United States, as mandated by PCAOB’s Rule 3211, increases their reputation concerns. The results indicate that, among clients with existing or potential internal control material weaknesses, there is an increased likelihood of adverse internal control opinions in the post-Rule 3211 period. In addition, in the post-Rule 3211 period, clients with high internal control risk experience a significantly greater increase in audit fees and audit report delays compared to clients with effective internal controls. Furthermore, the study shows that adverse opinions increase the likelihood of early audit partner rotations within the same audit firm. These findings are valuable for regulators and audit firms seeking to understand how auditors’ reporting on internal controls has evolved in response to engagement partner identification and heightened reputation concerns. The third essay examines how individual audit partners respond to horizontal pay disparities among partners within audit firms. The study utilizes Belgian data, a setting in which most audit partners establish limited liability management entities through which they perform audit services and bill the audit firm. This structure allows for observing the actual partner compensations. The findings reveal that greater pay disparity among partners is associated with lower audit quality, with partners earning below the firm's average delivering lower-quality audits as overall compensation disparity increases. The results are more pronounced among male and early-career audit partners. Further analyses dismiss the alternative explanation that these findings are driven by auditors with lower ability or quality. This study provides practical insights for audit firms in designing effective compensation systems for partners.