Homophily versus monitoring: Do all female board directors drive the gender assignment of audit partners?

Introduction

In many countries, women are poorly represented in the upper echelons of the accounting profession, where the greatest responsibility and power lies (i.e., partnership position). Nevertheless, female audit partners are found to be associated with ethical audit decision-making and reduced opportunistic accounting practices. One potential argument in favour of engaging female audit partners could then be that they have a core set of principles and values shared with female board directors. The personal attributes of audit partners are likely to be a factor in the preferences of board (audit committee) members and may give rise to situations in which homophily plays an important role in the audit partner assignment process. The term homophily refers to people’s implicit tendency to prefer interacting with others who are similar to themselves. Our study goes beyond the homophily argument by distinguishing female directors according to their position on the corporate board. Because female independent directors and female audit committee members tend to be more vigilant monitors and are more concerned about oversight of financial reporting processes, they are likely to be more sensitive than female inside directors to the selection of audit partners for monitoring purposes. To enhance our understanding as to which of the homophily and monitoring arguments may prevail in the auditor selection process, we raise the question of whether all female directors uniformly drive the gender assignment of audit engagement partners regardless of their position on the corporate board.

Gender assignment of audit partners: Homophily versus monitoring arguments

The role of gender in the client-partner assignment process may be influenced by audit demand and supply factors, which are not necessarily mutually exclusive. The demand for male or female audit partners may be therefore stem from the clear preferences of corporate directors or managers to engage audit partners demographically similar to themselves. Outstandingly, audit quality may be attributable to audit firms’ discrimination against women, who are presumed to make greater effort to overcome barriers to career progression and to reach the audit partner level. In such a situation, gender-based homophily may be perceived as a response by female directors to male dominance in accounting firms at the partnership level and as acting in support of female audit partners, who are in a minority. In our study, we add another argument and we argue that the choice of engagement partners is likely to be affected by the disparity of incentives between those board members who are more involved in the board’s monitoring duties and those who are not. Indeed, the gender-based homophily argument may hold if all categories of female directors uniformly drive the gender assignment of audit partners regardless of their position on the board.

Three main positions on corporate boards have been identified—inside directors, independent directors, and audit committee members—which may differentially impact the board’s decision-making process. With regard to gender difference, female inside directors, as opposed to female independent directors and female audit committee members, are not associated with diligent monitoring of managers’ activities and decisions. Accordingly, the process of selecting engagement partners is more likely to be influenced by divergent interests and the disparity of incentives between female board members involved in the board’s monitoring function and female inside directors. Female independent directors and female audit committee members are then expected to be more sensitive than female inside directors to the selection of audit partners for monitoring purposes. In contrast, female inside directors are more concerned with their employment and career opportunities, in that they are more motivated and inclined to act in line with the interests of board leaders and the top management team. Thus, the demand for gender-diverse audit partners may arise as a situated social practice, resulting from client needs and recognition of the quality of gender-differentiated audits rather than from a homophily based recommendation system.

Findings

We use archival data from a sample of French firms listed on the SBF 120 index over the period 2002-2019 to ascertain which of the homophily and monitoring arguments is dominant in the auditor selection process. In the French joint audit setting, two engagement partners are assigned by each audit firm to jointly conduct the audit. An important consequence of joint audit regulation is that listed firms may be audited by same-gender audit partners (two male, two female) and gender-diverse audit partners (one male and one female). The empirical findings support our conjecture by showing that the demand for gender-diverse engagement partners is largely driven by the proportion of female independent directors and the proportion of female audit committee members. Our findings provide compelling evidence that because they are involved in the board’s monitoring duties and willing to challenge managers, female independent directors and female audit committee members tend to select gender-diverse engagement partners. In contrast to the homophily argument, we find the proportion of female inside directors to be negatively associated with the selection of gender-diverse engagement partners. Female inside directors are more prone to be closely aligned with the interests of board leaders and the top management team, including their audit partner preferences.

The French parliament introduced the gender quota law in 2011 requiring companies to have a board of directors comprising at least 20% female members up until 2014 and at least 40% female members by 2017. With regard to the enactment of the gender quota law, our results reveal that the impact of the gender quota legislation is not limited to the greater propensity of French firms to appoint female directors to monitoring positions, but has substantially increased the demand for gender-diverse audit partners. We also find that the gender quota legislation strengthens the relationship between the proportion of female directors appointed to monitoring positions and the selection of gender-diverse audit partners. Finally, the findings indicate that female inside directors are not likely to promote gender-diverse audit partners in the pre-quota period and even less so in the post-quota period.

Implications

An important implication of our findings is that female directors should not be treated as a homogeneous group with regard to the process of selecting external auditors. The evidence presented in this study adds to our understanding of how factors affecting the gender assignment of audit partners may inform various stakeholders interested in the selection of external auditors. Our results have also important implications for companies and policy-makers. Appointing female directors as independent and as audit committee members is important as it likely to promote gender diversity in the audit industry, which is still much affected by gender discrimination at the partnership level. However, the gender quota law, predominantly driven by public policy to address greater gender equality on boards, is silent on the role played by female directors in the decision-making process. There is also no legislation encouraging the appointment of female directors to key monitoring positions, that is, as independents on the board or the audit committee. Based on the findings of the present study, policy-makers need to be conscious that female directors cannot be considered as a homogeneous group since they may affect board decision-making differently according to their position on corporate boards. To capitalize on the benefits of gender diversity, we also urge regulators to assess the strengths and weaknesses of the gender quota law and to be aware of its implications for management and board decision-making.