Accounting Firm’s Internal Characteristics and Audit Quality.

• In Event: Accounting Firm Policy an Audit Quality

Abstract

The PCAOB’s audit quality framework dictates that superior inputs (e.g., audit engagement team personnel) are prerequisites for achieving high audit quality. Accounting firms’ input quality rests on their ability to recruit and retain top talent as well as maintain certain levels of employee satisfaction. This study uses crowd-sourced employee-level reviews of accounting firms to examine: (1) what determines employee’s ratings of Big 4 and non-Big 4 accounting firms, (2) what drives employee turnover, and (3) how internal accounting firm characteristics relate to audit quality. We find that “career opportunities”, “senior management”, and “culture and values” play a more important role in how accounting firm employees rate their employer overall than “compensation and benefits” or “work-life balance” does. We also document a Big 4 brand effect, as Big 4 employees rate their employer consistently higher and recommend their employer to others more often than non-Big 4 employees do. We find evidence that accounting firm employees’ overall satisfaction is associated with audit quality, as measured by discretionary accruals and the propensity to issue a going concern opinion. Audit quality is negatively related with employee satisfaction for the non-Big 4, but appears to be positively related with employee satisfaction for the Big 4. Additionally, we provide some evidence suggesting that although a better work-life balance at the non-Big 4 translates into higher audit quality, improving work-life balance at the Big 4 may not necessarily improve audit quality. Finally, we find that the longer employees work at an accounting firm, the lower is their clients’ audit quality, on average.

Authors

• Joshua Khavis, Temple University

• Jagan Krishnan, Temple University