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Refer Exhibit 1,2,3 from 'critique of quantitative and qualitative research' hanout and I would like you to take an Exhibit 3 of "research critique framework" as your outline and include all of the criteria on it and reason out why you think so.
Female Auditors and Accruals Quality
Kim Ittonen, Emilia Va¨ha¨maa, and Sami Va¨ha¨maa
SYNOPSIS: This paper examines the association between accruals quality and the
gender of the firm’s audit engagement partner. In particular, given the documented
gender-based differences in diligence, conservatism, and risk tolerance, we postulate
that female auditors may improve accruals quality. Using a sample of Finnish and
Swedish NASDAQ OMX-listed firms, we run several alternative panel regressions of
abnormal accruals on female auditor variables and firm-specific controls. The results
suggest that firms with female audit engagement partners are associated with smaller
abnormal accruals, thereby implying that female auditors may have a constraining effect
on earnings management. In general, our findings indicate that the behavioral
differences between women and men may have important implications for the quality
of auditing and financial reporting.
Keywords: auditor gender; female auditors; gender differences; discretionary accruals;
abnormal accruals; accruals quality; earnings management.
Data Availability: The data used in this paper are derived from public sources.
This paper examines the association between accruals quality and the gender of the firm’s
audit engagement partner. Specifically, we aim to assess whether and how female auditors
affect the quality of financial reporting. The motivation for this analysis is based upon the
behavioral differences between women and men that have been extensively documented in the
psychology and behavioral economics literature (see, e.g., Feingold 1994; Byrnes et al. 1999; Costa
et al. 2001; Dwyer et al. 2002; Eckel and Grossman 2002; Nettle 2007; Schmitt et al. 2008; Croson
Kim Ittonen and Emilia Va¨ha¨maa are Assistant Professors, and Sami Va¨ha¨maa is a Professor, all at the
University of Vaasa.
We thank two anonymous referees, Dana Hermanson (co-editor), Phyllis Keys, Emma-Riikka Myllyma¨ki, S. Gulfem
Bayram, and participants at the 2011 American Accounting Association Meeting, the 2011 Southern Finance Association
Meeting, and the 2010 Eastern Finance Association Meeting for helpful discussions and comments. We gratefully
acknowledge the support of the Academy of Finland (project no. 259676), Emil Aaltonen Foundation, the Finnish
Foundation for Advancement of Securities Markets, the Finnish Savings Banks Research Foundation, the Foundation for
Economic Education, the NASDAQ OMX Nordic Foundation, the Ostrobothnia Chamber of Commerce, and the Paulo
Part of this paper was written while E. and S. Va¨ha¨maa were visiting the University of Central Florida.
Submitted: October 2010
Accepted: July 2012
Published Online: January 2013
Corresponding author: Sami Va¨ha¨maa
Email: [email protected]
and Gneezy 2009). In particular, we presume that gender-based differences in cognitive information
processing, diligence, conservatism, overconfidence, and risk tolerance may have important
implications for the audit process and auditor judgments and, thus, ultimately, for the quality of
audited financial information.
It is widely acknowledged that external auditors play a central role in ensuring the integrity of
the financial reporting process (see, e.g., Cohen et al. 2004; Watkins et al. 2004; Lin and Hwang
2010). Over the past few years, the relationship between auditors and the extent of earnings
management has been empirically examined in, for instance, Balsam et al. (2003), Kim et al.
(2003), Myers et al. (2003), Nagy (2005), Jenkins et al. (2006), Piot and Janin (2007), Srinidhi and
Gul (2007), Caramanis and Lennox (2008), Jenkins and Velury (2008), and Gul et al. (2009). These
studies provide considerable evidence to suggest that auditor attributes such as reputation,
independence, industry expertise, and tenure affect the quality of the client firm’s financial
reporting. In general, the prior literature shows that external auditors are effective monitors of
financial reporting quality.
Although the association between external auditors and earnings management has been
examined extensively in the literature, surprisingly little attention has been devoted to the potential
effects of auditor gender. Our idea to focus on auditor gender effects is not, however, completely
novel. Chung and Monroe (2001), O’Donnell and Johnson (2001), and Gold et al. (2009) conduct
experiments on the influence of auditor gender on audit judgments. These experimental studies
suggest that the gender of the auditor may affect the audit process. Chung and Monroe (2001)
document that female audit partners are more accurate and effective information processors in
complex audit tasks, while O’Donnell and Johnson (2001) show that female auditors may exhibit
greater efficiency in audit judgments. Gold et al. (2009) find that female auditors are less influenced
by unverified client explanations. However, in contrast to Chung and Monroe (2001), their
experiment also suggests that the audit adjustments proposed by female audit partners may be less
accurate. In this paper, we attempt to extend the above experimental literature by empirically
examining the relationship between female auditors and accruals quality.1
In brief, our empirical findings indicate that the gender of the audit engagement partner is
associated with the quality of financial reporting. Using a sample of Finnish and Swedish NASDAQ
OMX-listed firms, we document that the client firms of female audit engagement partners may have
higher accruals quality than firms audited by male audit partners. In contrast to the United States
and the United Kingdom, it is mandatory in Finland and Sweden to disclose the identity of the audit
partner(s) in the audit reports, and thereby the NASDAQ OMX firms provide an expedient setting
to empirically examine the effects of auditor gender on accruals quality. We use modified versions
of abnormal accruals measures originally developed by Jones (1991) and Dechow and Dichev
(2002) to estimate proxies for accruals quality, and run several alternative panel regressions of
abnormal accruals on female audit partner variables and firm-specific controls. These regressions
demonstrate that the client firms of female audit engagement partners are associated with
significantly smaller absolute abnormal accruals. Our results also indicate that female auditors may
constrain the use of both income-increasing and income-decreasing accruals. Thus, consistent with
the prior experimental studies, our empirical findings suggest that the inherent gender differences
1 While revising this paper, we became aware of a contemporaneous independent study by Niskanen et al. (2011)
that also examines the effects of auditor gender on earnings management. Niskanen et al. (2011) use data on
small- and medium-sized private Finnish firms, and document a positive association between female auditors and
earnings quality. In contrast to Niskanen et al. (2011), we use data on large, publicly listed Finnish and Swedish
firms, which are obliged to use professional, certified auditors, are required to follow the IFRS reporting
standards and, moreover, have to comply with a stricter legal environment, as well as with the listing
requirements of the NASDAQ OMX Nordic Exchange. Nevertheless, the results of Niskanen et al. (2011) can be
viewed as complementary to the empirical findings reported in this paper.
206 Ittonen, Va¨ha¨maa, and Va¨ha¨maa
may affect the audit process. Moreover, the results of this study are broadly consistent with the vast
body of literature on gender differences in diligence, conservatism, and risk tolerance. Overall, our
findings suggest that the behavioral differences between women and men may have important
implications for the quality of auditing and financial reporting.
The remainder of the paper proceeds as follows. The next section reviews the related literature
and presents our research hypothesis. The third section describes the data on the Finnish and
Swedish NASDAQ OMX firms, while the fourth section presents the methodology used in the
analysis. Our empirical findings on the relationship between accruals quality and female audit
partners are reported in the fifth section. Finally, the last section provides concluding remarks.
BACKGROUND AND HYPOTHESIS
External Auditors and Financial Reporting Quality
The quality of financial reporting can be compromised due to the management’s intentional
manipulation of accounting information by using the discretion provided in accounting principles
and financial reporting standards. The contracting-based theory of accounting posits that the
executives of the firm either efficiently report accurate financial information to stakeholders, or that
they opportunistically manipulate reported earnings for private gains or in order to mislead some
stakeholders about the firm’s financial performance (see, e.g., Holthausen 1990; Christie and
Zimmerman 1994). Although several measures of financial reporting quality have been proposed in
the literature, the most commonly used construct is a measure of abnormal accruals that intends to
assess discretionary components in reported earnings (see, e.g., Becker et al. 1998; Francis et al.
2005; Geiger and North 2006; Ali et al. 2007). These discretionary accruals are temporary
adjustments that resolve timing problems between accounting earnings and the underlying cash
flows at the cost of making assumptions and estimates.
Given that opportunistic, self-interested executives may have incentives to report overly
optimistic earnings, it is the role of the external auditors, board of directors, and other corporate
governance actors to attempt to constrain excessive earnings management (see, e.g., Christie and
Zimmerman 1994; Cohen et al. 2004; Lin and Hwang 2010). Recent legal reforms, such as the
Sarbanes-Oxley Act of 2002, have further emphasized the central role of the external auditors in
ensuring the integrity of the financial reporting process. It is, therefore, not surprising that a vast
body of empirical auditing literature has recently focused on the association between auditors and
earnings management (see, e.g., Balsam et al. 2003; Kim et al. 2003; Myers et al. 2003; Nagy 2005;
Jenkins et al. 2006; Piot and Janin 2007; Caramanis and Lennox 2008; Jenkins and Velury 2008;
Gul et al. 2009). In general, this literature indicates that the extent of earnings management is
influenced by auditor attributes such as reputation, independence, industry expertise, and tenure.
Becker et al. (1998) investigate the relationship between auditor quality and earnings
management, and report that the client firms of the Big 6 auditors have lower discretionary accruals
than the clients of other auditors. In a similar vein, Francis et al. (1999), Nelson et al. (2002), and
Kim et al. (2003) document that auditors with better reputations are more effective in curtailing
excessive earnings management behavior. Srinidhi and Gul (2007) focus on the effects of auditor
independence by examining the association between nonaudit fees and earnings management. Their
findings indicate that auditor independence improves the quality of reported earnings.
Johnson et al. (2002), Frankel et al. (2002), Myers et al. (2003), Ghosh and Moon (2005),
Nagy (2005), Jenkins and Velury (2008), and Gul et al. (2009) examine the relationship between
auditor tenure and earnings management, and document that auditor tenure is positively associated
with the quality of financial reporting. Balsam et al. (2003), Krishnan (2003), and Jenkins et al.
(2006) show that an auditor’s industry expertise affects discretionary accruals. In particular, Balsam
et al. (2003) find that the client firms of industry-specialist auditors have higher earnings quality
Female Auditors and Accruals Quality 207
than clients of non-specialists, while Jenkins et al. (2006) report that the decrease in earnings
quality during the late 1990s was significantly smaller for the clients of industry-specialist auditors.
Finally, Caramanis and Lennox (2008) take advantage of a unique Greek dataset on audit hours to
examine the effect of auditor effort on earnings quality. They find that low auditor effort increases
managerial opportunities for aggressive earnings management.
It has long been acknowledged in the cognitive psychology and behavioral economics
literature that significant gender-based differences exist, e.g., in information processing, diligence,
conservatism, overconfidence, cautiousness, and risk tolerance (see, e.g., Levin et al. 1988;
Feingold 1994; Johnson and Powell 1994; Byrnes et al. 1999; Costa et al. 2001; Eckel and
Grossman 2002; Nettle 2007; Schmitt et al. 2008). Several studies have documented that women
are more conservative and risk-averse than men, and may exhibit less risky behavior in financial
decisions (see, e.g., Powell and Ansic 1997; Jianakoplos and Bernasek 1998; Barber and Odean
2001; Dwyer et al. 2002; Watson and McNaughton 2007). The prior literature also indicates that
women may have a higher propensity to comply with rules and regulations in taxation and financial
decision contexts (see Baldry 1987; Barnett et al. 1994; Bernardi and Arnold 1997; Fallan 1999;
Beu et al. 2003; Pierce and Sweeney 2010). It is conceivable that the gender traits related to
conservatism, risk tolerance, and compliance with rules may have implications for the integrity of
the financial reporting process.2
Furthermore, based on previous literature, it is plausible to expect that female audit
engagement partners are generally highly competent and hard-working. Given the well-known glass
ceiling phenomenon, women may have to demonstrate extra competence in order to reach the top
levels of the hierarchy, such as positions as partners in audit firms. Accordingly, recent empirical
studies by Green et al. (2009) and Kumar (2010) indicate that female financial analysts may need to
possess better-than-average skills in a financial expertise environment due to gender discrimination.
3 Moreover, Fondas and Sassalos (2000) argue that women tend to have higher expectations
regarding their responsibilities, which may induce them to expend more effort on their tasks. These
gender differences in skills and effort may be expected to affect the scope and performance of the
Although the documented behavioral differences between women and men may inherently
influence the audit process and auditor judgments, potential auditor gender effects have so far
received surprisingly little attention in the auditing literature. The few exceptions are the
experimental studies by Chung and Monroe (2001), O’Donnell and Johnson (2001), and Gold et al.
(2009), and a recent empirical study by Ittonen and Peni (2012). Chung and Monroe (2001)
examine the relationship between auditor gender on audit judgments, and document that female
audit partners are more accurate and effective information processors in complex audit tasks. In a
similar vein, O’Donnell and Johnson (2001) find that female auditors may exhibit greater efficiency
in their audit judgments. Gold et al. (2009) report that female auditors are less influenced by
unverified client explanations. However, in contrast to Chung and Monroe (2001), their experiment
also suggests that the audit adjustments proposed by female audit partners may be less accurate.
Finally, Ittonen and Peni (2012) examine the relationship between female auditors and audit fees in
an empirical setting using data from three Nordic countries. Their findings indicate that firms with
2 Anecdotal evidence from the recent high-profile accounting scandals indicates that females have often acted as
the whistleblowers (e.g., Sherron Watkins at Enron and Cynthia Cooper at WorldCom).
3 While Kumar (2010) reports that female analysts issue more accurate earnings forecasts, the findings of Green et
al. (2009) indicate that the forecasts of female analysts are less accurate. Nevertheless, Green et al. (2009) also
document that female analysts outperform male analysts in other aspects of job performance.
208 Ittonen, Va¨ha¨maa, and Va¨ha¨maa
female audit engagement partners have higher audit fees, suggesting that auditor gender may affect
audit effort. Overall, the previous studies suggest that the gender of the auditor may affect the audit
process. In this paper, we aim to contribute to the literature by empirically examining the
relationship between female auditors and accruals quality.
Closely related to the current study, Barua et al. (2010) and Peni and Va¨ha¨maa (2010) postulate
that gender-based behavioral differences may affect the quality of financial reporting. More
specifically, both Barua et al. (2010) and Peni and Va¨ha¨maa (2010) use data on large U.S. firms to
empirically examine the association between female executives and accruals quality, and document
that firms with female chief financial officers (CFOs) are associated with more conservative
financial reporting practices. Thus, these studies provide empirical evidence to suggest that female
executives may make more cautious and conservative decisions with respect to earnings
management. We attempt to extend Barua et al. (2010) and Peni and Va¨ha¨maa (2010) by
assessing the potential effects of gender differences on financial reporting quality in the context of
audit engagement partners.
In this paper, we presume that the gender-based differences in cognitive information
processing, diligence, conservatism, and risk tolerance may have important implications for the
audit process and auditor judgments and, thus, ultimately, for the quality of financial reporting. The
documented gender differences in cognitive information processing and diligence may affect audit
effort and the intensity of monitoring. Therefore, it is plausible to expect that female audit
engagement partners may be more effective monitors of excessive earnings management behavior.
Furthermore, the gender-based differences in conservatism and risk tolerance imply that female
auditors may inherently promote more conservative financial reporting practices and make less
risky audit judgments. Thus, based on the behavioral differences between women and men, we
posit the following general research hypothesis:
H1: The client firms of female audit engagement partners have higher accruals quality than
firms audited by male audit partners.
We empirically assess the accruals quality by estimating the magnitude of abnormal accruals in
reported earnings.4 We focus on the association between female audit engagement partners and the
magnitude of abnormal accruals, and we also examine the effects of female auditors on incomeincreasing
and income-decreasing abnormal accruals. Given the gender-based differences in
information processing, diligence, conservatism, and risk tolerance, we posit that female auditors
constrain the degree of earnings management in general and, therefore, we expect that absolute
abnormal accruals are lower for the client firms of female auditors.
Previous studies indicate that auditors are more likely to disagree with their clients about
income-increasing than income-decreasing financial reporting practices (see, e.g., DeFond and
Jiambalvo 1993; Kinney and Martin 1994; Nelson et al. 2002). As discussed by Caramanis and
Lennox (2008), auditors face higher litigation and reputational risks stemming from overstated,
rather than understated, earnings. Hence, if the gender-based differences in conservatism and riskaversion
influence the audit process and the riskiness of audit judgments, we should observe the
firms with female audit engagement partners to be associated with lower income-increasing
abnormal accruals than the client firms of male auditors. Furthermore, the prior literature suggests
4 In our empirical analysis, we focus on abnormal accruals and ignore alternative measures of earnings quality,
such as earnings restatements, the timeliness of loss recognition, earnings response coefficients, and the
likelihood of meeting or beating analysts’ earnings forecasts.
Female Auditors and Accruals Quality 209
that increased audit effort may decrease income-increasing earnings management (Caramanis and
Lennox 2008). We posit that gender differences in information processing and diligence may affect
audit effort and, thus, we expect a negative relationship between female auditors and incomeincreasing
The association between female audit engagement partners and income-decreasing abnormal
accruals may be positive or negative. If female auditors have a lower tolerance toward earnings
management in general, we should observe that the magnitude of income-decreasing abnormal
accruals is lower for the client firms of female auditors. Moreover, female auditors may be more
prone to constrain income-decreasing financial reporting practices driven by tax reduction
incentives or minimization of litigation and regulatory costs. On the other hand, income-decreasing
abnormal accruals are often considered to reflect accounting conservatism, and may indicate
asymmetric treatment of unrealized gains and losses. If female audit engagement partners prefer
more conservative accounting choices, the client firms of female auditors may have larger incomedecreasing
abnormal accruals. Given the somewhat ambiguous theoretical relationship between
income-decreasing earnings management and female audit engagement partners, we make no
prediction about the effect of female auditors on income-decreasing abnormal accruals.
The data used in the empirical analysis consist of the Finnish and Swedish firms listed in the
NASDAQ OMX Nordic exchange as of the end of 2007. The sample covers fiscal years
2005–2007. After excluding financial institutions (SIC codes 6000–6900) due to their unique
features, and after removing observations with insufficient financial data in Thomson Reuters
Worldscope, we obtain a sample consisting of 770 firm-year observations. For these 770 firm-year
observations, we manually collect the names of the audit engagement partners from the firms’ audit
reports. The firms listed in the NASDAQ OMX Nordic exchange are required to provide an audit
report signed by at least one audit engagement partner, even if an audit firm is appointed. Thus, by
reviewing the engagement auditors’ names from the audit report, the gender of the audit
engagement partner(s) can be determined.6 Table 1 reports the distribution of the data classified by
industry and auditor gender.
Since the audit engagement partner is identifiable from the audit reports, the institutional
setting in Finland and Sweden provides an expedient environment for studying whether and how
the gender of the audit engagement partner affects the quality of financial reporting. This is in
contrast with the United States and the United Kingdom, where only the name of the responsible
audit firm is public information, and the identity of the actual audit engagement partner is
The legal environments, as well as the listing requirements, concerning corporate governance,
financial reporting, and auditing are similar for Finnish and Swedish firms listed on the NASDAQ
OMX Nordic exchange and, thus, these firms can be analyzed as one group. Sinani et al. (2008)
find, however, some differences in the formal board and ownership structures between the Nordic
countries. The main difference in the ownership structure between Finland and Sweden is that the
Swedish firms have, on average, a higher proportion of family ownership, whereas state ownership
5 In a recent empirical study, Ittonen and Peni (2012) document that firms with female audit engagement partners
have higher audit fees. This finding indicates that the gender-based behavioral differences may affect audit effort.
6 Some clients have opted to engage two audit partners from the same firm. In these engagements, both auditors
have signed the audit report and we consider both auditors to be jointly responsible for the audit.
7 Interestingly, the issue of disclosing the actual audit engagement partner is on the agenda of the Public Company
Accounting Oversight Board (PCAOB 2009). Consequently, the audit engagement partner signatures may
become obligatory information also in the United States.
210 Ittonen, Va¨ha¨maa, and Va¨ha¨maa
is more common in Finland (La Porta et al. 1998). According to Sinani et al. (2008), corporate
governance practices bear strong similarities in Finland and Sweden. There are also similarities in
the key corporate governance characteristics, such as trust, quality of enforcement, absence of
corruption, quality of government, and freedom of speech, which are all results of the two
countries’ small size and ethnical homogeneity.
From the audit engagement partner perspective, it should be noted that the requirements for
becoming a certified auditor are very similar in the two countries, as they both comply with the
Eighth Directive of the European Union. In both countries, auditors are required to have theoretical
education, as well as professional experience, and they need to pass a practical examination before
being certified. Accordingly, the audit engagement partners in Finland and Sweden have very
similar educational backgrounds and professional experience.