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UBC Theses and Dissertations

Essays on auditing : the matching of partners with clients, and the effects of mandatory auditing on the strategic decisions of banks Wu, Yiqin (Pauline)


This thesis is a set of two essays on auditing. Chapter 2 explores how audit firms match audit partners with client firms. I use machine learning algorithms to predict audit quality for every client-partner pair within audit offices. I find that a partner who has a higher predicted audit quality on the focal client is more likely to be selected to audit it. In addition, audit firms prioritize large clients with higher potential litigation risks when allocating partners. On average, client-partner matching quality is higher for Big 4 audit firms and large audit offices. I also find that mandatory partner rotation improves partner matching quality, highlighting the bright side of the policy. Lastly, there are real implications of client-partner matching on ex-post audit quality. Lower matching quality is associated with worse ex-post audit quality, suggesting that machine learning algorithms might help human decision-makers improve their personnel management inside firms. Chapter 3 examines the real effects of mandatory audit regulation in the banking industry. Section 36 of the Federal Deposit Insurance Corporation (FDIC) Act requires banks with assets above $500 million to have a mandatory audit. We find that banks around the threshold strategically slow their asset growth, suggesting a perceived net cost of growing to be audited. In the cross-section, we find less strategic growth behavior in banks with a higher cost of capital, implying a substitution effect between the monitoring from investors and auditors. In addition, we find more prevalent strategic growth behavior in banks operating in poor-performing local economies and less competitive markets, highlighting the negative impact of the regulation on liquidity provision in those areas. We also find contagion effects of strategic growth among banks in the same area, suggesting that banks learn from their peers in making output decisions. Finally, we examine banks that voluntarily obtain an independent audit before crossing the threshold, where the empirical results corroborate our mandatory audit tests.

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