Auditors are certified, so does educational background matter? A new study co-authored at Cambridge Judge finds it does, as those with quantitative backgrounds produce better audits.
Auditors are certified as having the proper qualifications, so does the educational background of such an auditor matter? A new study co-authored at Cambridge Judge Business School finds that it does.
Auditors with an undergraduate university degree focusing on quantitative analysis – including accounting, engineering and maths – produce more accurate audited financial reports (as measured by recorded levels of “abnormal accruals”) than do auditors with a bachelor’s degree in fields with a more qualitative approach such as history, classics or law, says the study published in the European Accounting Review.
The study finds further that companies pay more for auditors with a degree in a quantitative subject, by 14.5% in the auditor sample studied.
“Taken together, our findings suggest that, from the perspective of the audit profession, auditors with university educations involving relatively high levels of quantitative and well-defined, domain-specific knowledge are associated with (higher quality) audit outcomes,” the study says.
The study – entitled “Auditor university education: does it matter?” – is co-authored by Dr Jenny Chu of Cambridge Judge Business School, and Professor Annita Florou and Professor Peter F. Pope, both of the Department of Accounting at Bocconi University in Milan.
“The study is the first of its kind in a Western economy, so it should be useful to both regulators and educators,” says study co-author Dr Jenny Chu, University Senior Lecturer in Accounting and Deputy Director of the Centre for Financial Reporting & Accountability at Cambridge Judge. “The study is made possible by the fact that regulations in the UK – in contrast to many other countries – allow individuals from any degree discipline (and some without) to train to be an auditor. The UK also required disclosure of signing auditors – those who sign off on the final audit of companies – earlier than most other countries.”
The research looks at the educational background of auditors operating in the UK in the years 2011 (when disclosure of a lead auditor‘s name became mandatory) to 2014.
The study‘s initial sample included 1,107 unique signing auditors and 2,026 unique clients. Following the hand-collection of university-level educational background of signing auditors including degree subject, completion date and postgraduate studies, the final sample comprises 695 unique signing auditors, of whom only 24% held an undergraduate degree in accounting.
The study‘s results are based on two proxies of audit quality: performance-adjusted abnormal accruals and abnormal working capital accruals – which were both 2.7% lower for auditors with a quantitative education. Financial sector companies are excluded from the study because the financial information required is not comparable with other firms.