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Auditing Committees Hire Handsome Partners

Does your audit committee lack Big Four experience? They’re more likely to select an outside auditor for their good looks.

Based on the research of Nicholas Hallman and Steven Kachelmeier

Companies and their corporate audit committees — made up of board of director members — rely on outside auditors to help them comply with ever-changing regulations and keep the books in good shape. But what type of criteria do audit committee members hone in on when they’re selecting an audit partner?

In a recent study on the auditor selection process, Texas McCombs Assistant Professor of Accounting Nicholas Hallman and Accounting Professor Steven Kachelmeier, along with Matthew Baugh of Arizona State University, found that audit committees that lack members with experience working at the Big Four accounting firms are twice as likely to focus on superficial cues such as audit partners’ appearances during the interview process, favoring and picking the most attractive partners.

On the flip side, audit committees with at least one member who has worked at accounting firms Deloitte, Ernst & Young, PwC, or KPMG tend to follow a more informed and diagnostic process during partner interviews that does not rely on auditors’ physical appearances.

The researchers didn’t find any evidence that attractive audit partners produce worse audits in general. However, “if audit committees fixate on partners’ physical appearance in lieu of more substantive characteristics, such as expertise, when selecting partners, the evidence suggests that they get lower-quality audits,” Hallman says.

When Looks Matter

Academics have long studied the personal benefits or costs of physical attractiveness — or lack thereof — in daily life, including in the workplace. The authors saw an opportunity to expand attractiveness research by investigating whether looks matter in the context of selecting corporate auditors.

“Presumably, looks shouldn’t matter when it comes to the relationship between a company and an auditor,” Hallman says.

“So, if we think it shouldn’t matter, then what can be done to make sure that it doesn’t matter?” — Nicholas Hallman

The researchers started by identifying lead audit partners at the Big Four accounting firms from data published by the Public Company Accounting Oversight Board from 2017 through July 2020. They found photos of 40% of the partners using social media and the companies’ websites, resulting in a final sample size of 837 partners associated with 1,377 audit clients. Female partners composed 19% of the sample.

Then the researchers hired workers from the crowdsourced employment website Amazon Mechanical Turk to obtain nine attractiveness ratings for each partner from photographs. Each was rated on a seven-point attractiveness scale. Partners with average attractiveness ratings of five or higher, or who ranked in the top 20%, were considered to be attractive.

Using a database developed by the relationship mapping company BoardEx, the researchers determined whether each audit committee member had previous audit experience with a Big Four public accounting firm. They also collected photos of audit committee members to rule out the possibility that committee members were merely picking auditors who looked similar to themselves.

They found that just over half of audit committees included a member with Big Four experience. Committees generally had three to five members, and those with at least one member with Big Four experience and expertise tended to disregard appearances when choosing an audit partner. On the other hand, committees with no Big Four expertise tended to rely on physical attractiveness when they selected a lead partner.

“It’s not blatant prejudice,” Kachelmeier says.

“But in the absence of substantive knowledge about the job, people resort to subconscious biases. If someone’s done the job themselves, however, they tend to ask more relevant questions.” — Steven Kachelmeier

Avoid Biases With Expertise

One counterargument in favor of choosing attractive auditors is that they’re charming and may have better connections, says Kachelmeier. But “we didn’t find evidence of that,” he says. The researchers also found that results were the same even when restricted to male or female partners, meaning the study’s findings don’t apply to only one gender.

Instead, “the study suggests that a lot of companies are not taking the need for meaningful audit experience in their audit committees very seriously,” Kachelmeier says. “Do you want the best auditor or the best-looking auditor?”

To increase their chances of successful audits, companies should find qualified people who are well versed in the audit process, Kachelmeier adds. Expertise helps audit committees to fulfill their duties more effectively.

The good news, the researchers say, is that it takes only one member with Big Four experience to get an audit committee to avoid focusing on appearances. It doesn’t require members who have decades of experience and doctorates in accounting. “Just don’t have an audit committee where nobody has experience as an auditor,” says Kachelmeier.

The study also adds to the research on the possible social benefits of attractiveness. At least when it comes to picking audit committee partners, when attractive people get ahead, it seems to be because the people evaluating them have limited expertise.

“It’s not an inevitable part of life that you’re going to be judged on your appearances,” Hallman says. “If you’re judged by people with expertise, you’re going to be judged less on your looks.”

A Matter of Appearances: How Does Auditing Expertise Benefit Audit Committees When Selecting Auditors?” is forthcoming, online in advance in Contemporary Accounting Research.

Story by Deborah Lynn Blumberg

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Research and insights from Texas McCombs

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Texas McCombs

Texas McCombs

News, business research, and ideas from the McCombs School of Business at The University of Texas at Austin. Learn more at www.mccombs.utexas.edu

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