That's What Friends Are For: Audit Quality and Accounting Employee Affiliations with Audit Firms

• In Event: Auditor Employment

Abstract

Non-executive accounting employees are ‘affiliated’, or alumni, if they previously worked for their companies’ audit firms. Using a unique data set consisting of biographical data on over 63,000 accounting employees working at S&P 1500 companies who were previously employed at public accounting firms, we study the effect of alumni affiliations on audit quality. Companies with a larger proportion of alumni among their accounting employees are significantly less likely to issue financial misstatements, and have lower absolute abnormal accruals. In an effort to better understand the internal financial reporting process, we divide employees into categories by job rank and find that only lower level accounting employees have positive effects on both measures of audit quality. Our results shed light on the way non-executives affect audit quality, and are of practical importance to the hiring of accounting employees by public companies.

Authors

• Andrew Bird, Carnegie Mellon University

• Nam Ho, Carnegie Mellon University

• chan li, university of pittsburgh

• Thomas Ruchti, Carnegie Mellon University