Condie, E.R.; Lisic, L.L.; Seidel, T.A.; Truelson, J.M.; & Zimmerman, A.B. (2023). Does gender and ethnic diversity among partners influence office-level audit personnel retention and audit quality? Contemporary Accounting Research, 40(4), 2477-2511. https://doi.org/10.1111/1911-3846.12882
business.msstate.edu
Conventional wisdom says that diversity is good for business. For decades, studies have explored the benefits of increased diversity on innovation, workplace decision making, and more.
Employers have elevated the attention on their diversity, equity, and inclusion (“DEI”) initiatives. Corporate diversity statements tout the importance of bringing diverse perspectives into their everyday work and overall strategies. Companies track diversity by monitoring the numbers of diverse professionals hired and promoted. But while companies work to diversify the talent pipeline, often the numbers taper off in the higher ranks of leadership.
At the same time, there are questions about the effectiveness of DEI initiatives and the motivations for those initiatives. For example, a 2022 survey by the Society for Human Resources Management found that 64 percent of organizations said that diversity, equity, and inclusion were important. The survey found that a strikingly similar number – 62 percent – indicated that no or limited resources were devoted to DEI.
With the tension between the prevalence of DEI initiatives and the questions about their efficacy, a group of researchers from the Mississippi State University College of Business, Georgia Institute of Technology Scheller College of Business, Virginia Polytechnic Institute and State University Pamplin College of Business, Brigham Young University Marriott School of Business, and Florida State University College of Business sought to quantify the effects of gender and ethnic diversity at the partner level in U.S. accounting firms.
In paper published in the Contemporary Accounting Research journal of the Canadian Academic Accounting Association, the researchers studied the effects on employee retention and audit accuracy of gender and ethnic diversity of firm partners. In addition to data on accounting firm job postings and corrected audits, the researchers drew from interviews with U.S. audit partners and directors. The paper is among the first to quantify diversity initiatives at accounting firms.
The paper concluded that greater levels of ethnic and gender diversity in partners were associated with reduced turnover among audit professionals and increased audit quality.
“[W]e believe the findings in this study underscore the importance of diversity in office audit partner gender and ethnicity to the office audit practice. The results also highlight the economic value of officelevel efforts to promote diversity.”
– J. Mike Truelson et al.
Article: Does gender and ethnic diversity among audit partners influence office-level audit personnel retention and audit quality?
“The more diversity you have in that group, the more ideas you will get, and I think it leads to a more engaging work experience. … Those ideas energize the team … and in the long run, I think you will have a more productive, more efficient team.” –Survey Respondent
Discussions on diversity often focus on either the business case or the case for social good. A business case for DEI proposes that more diverse viewpoints lead to more creative solutions and ultimately boost the bottom line. According to the social case, representation in workplaces is a societal good and promotes the flourishing of historically underrepresented groups. The business and social cases can overlap, as in when a client demands greater diversity in an accounting firm it uses for audits, causing the accounting firm to increase diversity in part to bolster its bottom line.
Potential benefits of a diverse workforce include:
Stronger employee identification with the organization;
Broader or more balanced perspectives on strategic decisions;
Increased morale and job satisfaction;
Higher rates of retention; and
Increased worker investment into the success of the organization.
However, diversity efforts now seem to be facing greater resistance. After an upswing in diversity efforts in the wake of George Floyd’s murder in 2020, diversity efforts now seem to be on the decline. In 2023, the Supreme Court ruled against university affirmative action programs and a few states passed laws against DEI policies. Lawsuits filed against companies have alleged that diversity policies are discriminatory.
Opponents claim that DEI initiatives decrease office cohesion and undermine the principle of merit-based promotion. Others argue that such initiatives simply do not have an effect on retention. That is, workers leave jobs and professions regardless of the diversity of colleagues.
Even before the recent diversity fatigue, it has been difficult to promote diversity at the highest levels of company leadership. For example, the Accounting MOVE Project’s 2022 survey of accounting and consulting firms found that women made up 51 percent of new hires but only 31 percent of partners and principals.
These challenges will likely be top-of-mind as companies rethink DEI efforts.
The new article from Mississippi State and its research partners studied the effects of audit partnership diversity at the U.S. offices of the eight largest accounting firms that served public audit clients from 2016 to 2020. The researchers considered data from at least two-hundred unique offices during each year. In addition, the paper considered anecdotal evidence from more than twenty partner and manager level accounting audit leaders who were interviewed for the article.
The researchers explored the potential benefits of gender and ethnic diversity in leadership on both employee retention and in audit quality. They found that:
Stronger employee identification with the organization;
Broader or more balanced perspectives on strategic decisions;
Increased morale and job satisfaction;
Higher rates of retention; and
Increased worker investment into the success of the organization.
“Accounting firms have invested significant resources in diversity initiatives related to recruiting, retention, and promotion,” the article noted. “Our findings provide empirical evidence regarding the importance of having a more diverse group of office audit partners for auditor retention and audit quality.”
According to the article, the benefits were more pronounced in offices with both greater gender and ethnic diversity in partnership. It concluded, “These findings… suggest there is economic value in office-level efforts to promote diversity.”
Panel A: Average Composition of Office Audit Partner Gender and Ethnicity Average Office Composition Sample
Panel B: Economic Significance of Findings For an Average-Sized Office (i.e., Six Partners) with No Gender or Ethnic Diversity, Adding an Audit Partner with a:
-21.2%
Adding an audit partner with a different ethnicity to the average-sized office with no audit partner diversity resulted in a 21.2% decrease in the proportion of audit clients with misstated financial statements.
-13.9%
Adding an audit partner with a different gender to the average-sized office with no audit partner diversity resulted in a 13.9% decrease in the proportion of audit clients with misstated annual financial statements.
Organizational identification explores how closely employees identify themselves with their work organizations. Stronger organizational identification can lead to greater engagement. Diversity in organizational leadership is important not only because those leaders are making strategic decisions for the entire office.
Diversity in leadership also can help more junior employees identify with the company and in turn see a path forward for themselves. This is one of the reasons it is important to study not only how to bring in employees from a range of backgrounds but also how to retain and promote such employees.
According to article co-author and Mississippi State University College of Business Assistant Professor J. Mike Truelson, CPA, PhD, “The takeaway – since an audit firm isn’t that much different than any other firm or any other businesses – is that diversity is important at the top. … Diversity is something that you should be considering, that it can have an impact on the quality of your organization, the quality of the people you hire, turnover, most likely the quality of work.” While this research was among the first to quantify the impact of diversity in accounting audit offices, Truelson notes that his team’s paper draws on past research on diversity in other settings, like corporate boards of directors.
In recent years, we have seen public backlash against institutions whose statements on diversity appear to be merely performative. No matter what the business case for diversity, this backlash suggests that the public – and employees – are seeking not only diversity, but also authenticity.
One audit leader interviewed in the research noted, “If you don’t see it, you don’t believe it … when you look up, and you’re like, ‘Well, every single person on the leadership team is a White male.’”
Audit professionals interviewed for the article emphasized the importance of encouraging diversity “from the top.” Partners set the tone for office practices, evaluate the performance of more junior employees, and influence promotion decisions. These partners have an opportunity to contribute to positive organizational identification.
If, as this research indicates, partner diversity is important to not only employee retention but also work quality, then how does a firm encourage diversity in leadership and throughout the organization?
The audit leaders interviewed for the article discussed ideas including:
• AFFINITY GROUPS: Study participants highlighted the availability of affinity and employee networking groups to help retain professionals from a variety of backgrounds. Purposeful mentoring can allow individuals not only to stay with an organization but also to thrive.
• DIVERSE VIEWS: Audit leadership who participated in the research also noted that valuing the perspectives of diverse voices within an organization can enhance a sense of respect and belonging. Several leaders noted that employees who feel they can bring their “full selves” to the job are more engaged.
• LOCAL FOCUS: Respondents to the research work for major global public accounting firms. However, several emphasized the importance of focus on and commitment to diversity at the individual office level. While DEI policies may be set at the organization-wide level, local offices are often responsible for the execution of those policies. Conversely, the research found that greater diversity does not necessarily occur at the largest offices. Consider whether local practice can also impact firm-wide diversity.
• NONTRADITIONAL RECRUITING: Some interviewees observed that accounting firms often recruit heavily from “target schools,” which, depending on factors like the region, may not be highly diverse. Firms may want to pursue increased recruiting from a broader range of institutions.
Given the traditionally high turnover in public accounting firms, retaining employees is important not only to the organization but also for clients seeking continuity. These institutional-client relationships may themselves play a role in accuracy of work product. According to the authors of the article, the benefits of diversity should also be of interest to regulatory authorities. In other words, retention and audit quality associated with partner diversity should have value to a range of stakeholders.
“You have people who feel respected and … if people are motivated and want to be here, they are going to do better work, which leads to higher quality.”
Adding an audit partner with a different gender and ethnicity is associated with about a 15% decrease in audit job postings.
