Does Personality Similarity Influence the Formation of Auditor-in-Charge – Client Relationships and Audit Quality? Evidence from the Swedish Military Conscription Data

Abstract

This study investigates the role of personality similarity in the formation of auditor-in-charge (AIC) – client CEO dyads and the development of a collaborative relationship in the audit engagement. We apply the principle of homophily from sociology, i.e., the attraction of individuals with similar traits to one another, to the formation of supplier-customer dyads in auditing engagements. Our analyses suggest that AIC-CEO personality similarity increases the likelihood of dyad formation and AICs’ ability to retain clients. Using an instrumental variable approach, we further find that personality similarity enhances audit quality, especially (1) for clients with greater incentives to misreport, (2) at the beginning of the AIC-client tenure relationship, and (3) for small- and medium-sized companies. The audit quality results suggest that a personality homophily-based relationship facilitates collaboration in auditing engagements, leading to audit quality improvement. Overall, our evidence highlights the benefit of interpersonal relationships in the production of audit services.