Consequences of audit failure greater for ethnic minority partners
Despite the prevalence of diversity initiatives, accounting firms – particularly the big four – are still “very much lagging” on ethnic representation, research finds.
The big four consulting firms have all made commitments to boosting the gender and ethnic diversity of their workforces, including among senior leadership. Despite their claims, research suggests the firms continue to fall short.
“Accounting firms, especially the big four … have taken various measures to improve the diversity of their workforce by recruiting and retaining employees of various backgrounds,” said Zvi Singer, associate professor of accounting at HEC Montreal.
“Despite these efforts, diversity at more senior ranks in accounting firms is still very much lagging, especially with regard to ethnic representation.”
Last year, Singer published research that found that audit partners of minority ethnic backgrounds were more likely to work in smaller offices, earn lower audit fees, be non-big four, and face harsher consequences for an audit failure.
“White audit partners are more likely to be absolved of audit failures than [ethnic minority audit partners] and are consistent with the saviour effect,” said the research article.
While the study relied on data from the US, the accounting industry’s diversity issue is a global one, including Australia.
Women make up roughly half of Australian accounting graduates and have done so since the turn of the century, according to CA ANZ. However, they hold only one-third of the country’s senior accounting roles, while making substantially less.
In Australia, the ethnic diversity picture is somewhat less clear. That said, research has found a bias against international graduates, particularly Chinese students, in entering the profession.
According to Jolene Elliot, founder of TJ Accounting Consultants Indigenous Australians made up only 50 to 60 of the approximately 200,000 qualified accountants in the country in 2019.
Globally, however, the Association of International Certified Professional Accountants found, in 2019, that only 9 per cent of accounting partners identified as non-white.
Singer’s study also found that ethnic minority audit partners were more likely to lead engagements with clients whose top management had greater ethnic diversity.
Interestingly, the study found no evidence that ethnic diversity among audit committees affected client-partner associations the way it did among top management.
Ethnic minority groups were taken to include Asian, Black non-Latino, Hispanic Latino, and white non-Latino, as understood by the US Census.
The research team – Professor Gopal V Krishnan of Bentley University and assistant professor Jing Zhang of the University of Colorado Denver, along with Singer – relied on US data from 2016 to 2020.
The study outlined three possible explanations for the underrepresentation of ethnic minority audit partners among top earners.
First, minorities face “greater barriers” when trying to ascend to more senior positions.
Second, they are less likely to be offered entry positions in the “larger and more desired” audit offices – a trend that carries over to more senior positions.
Third, ethnic minority audit partners might “self-select” to work in smaller, less prestigious offices. While the study did not entirely rule out this third explanation, it did find that the underrepresentation is “unlikely” to be driven by self-selection alone.
Despite the challenges, CA ANZ said the accounting industry is uniquely positioned to overcome diversity issues, given the universality of its practices.
“As such, the different countries and cultures represented in an accounting lecture trump almost every other course,” it said.
“Yet, in the real world outside university, the profession’s senior leaders look remarkably similar to every other profession and industry. There is a significant lack of diversity.”
