Words that Bind: The Relation Between Language Homophily Between Audit Partner and Client Executives and Audit Outcomes

We examine the impact of language homophily between audit partners and client firm executives on audit outcomes. Focusing on the Indian context, which has rich linguistic diversity, our results suggest that when the audit partner and client firm executives-especially the CEO-share a common language, audit quality is lower. Specifically, we find robust evidence that language homophily is associated with income-increasing discretionary accruals, lower cash flow predictability, and reporting small increases in earnings. Further tests reveal that the results are moderated by CEO power and the client firm's business group affiliation, and that the negative association between language homophily and audit quality is mitigated when the audit partner belongs to a minority religion or caste. Overall, our findings suggest that language-based homophily between audit partners and CEOs can compromise auditor independence, leading to diminished audit quality, an increased provision of non-audit services, and reporting delays.