Karla Zehms, Ernst & Young Professor in Accounting and a professor in the Department of Accounting and Information Systems at the Wisconsin School of Business at the University of Wisconsin–Madison, is the winner of the Best Paper Award from the American Accounting Association’s Auditing Section.
The paper, “Auditors Are Known by the Companies They Keep,” was co-authored with former UW–Madison doctoral student Zach Kowaleski (BBA ’08, MAcc ’09, PhD ’18), now an assistant professor at the University of Notre Dame. Other co-authors include Dr. Jonathan Cook, a member of the Public Company Accounting Oversight Board, Professor Andrew Sutherland of the MIT Sloan School of Management, and Professor Michael Minnis of the University of Chicago Booth School of Business. The paper is forthcoming in The Journal of Accounting and Economics.
“The award for this paper is further testimony to Professor Zehms’ standing as one of the top researchers in WSB. It further validates her recognition as the 2016 recipient of the School’s prestigious Erwin A. Gaumnitz Distinguished Research Award,” says Terry Warfield, PwC Professor and Richard J. Johnson chair of the Department of Accounting and Information Systems.”
The work extends Professor Zehms’ stream of research on audit firm portfolio management decisions and examines the role of client reputation in auditor-client matching. Using 1.2 million employment records from U.S. broker-dealers, the results reveal that broker-dealer clients of the same audit firm have similar financial adviser misconduct profiles (e.g., complaints about unsuitable investments or excessive trading). Auditors adjust their portfolios when presented with new information about financial adviser misconduct, and those audit firms with the most significant reputation concerns are least likely to deal with high-misconduct clients. Further, an auditor’s reputation for accepting high-misconduct clients predicts their new clients’ future misconduct. The results are important because they present a cautionary tale: non-discerning auditors emerge to provide assurance services to clients with a low endogenous demand for high-quality auditing.
The award was granted at the association’s midyear meeting in January.