The Relationship between Human Resource Practices and Audit Quality

• In Event: Trust, Human Resources, International Aid and Reporting Quality
  In Paper Session: Trust, Human Resources, International Aid, and Reporting Quality

Abstract

In this paper we examine the relationship between human resource management practices by Big 4 audit firms and audit quality. Based on system theory of the strategic human resource literature (see, for example, Wright and McMahan, 1992) we argue that the relationship between human resource practices in audit firms and audit quality is mediated by an audit firm’s competence management and behavior management. Accordingly we test the effect of auditor training, accreditation, workload and remuneration on accruals-based earnings quality for a sample of 21,051 Big 4 clients over the period 2005-2009. Our findings indicate that the HR policies of audit firms – as identified through a principal component analysis – significantly relate to the accruals-based earnings quality of their client firms. In particular, we also find that training (both hours as well as costs) is significantly positively associated with our proxy of audit quality, and that both staff and partner workload are negatively associated with audit quality. Note that we do not find evidence of an association between accruals-based earnings quality and the (relative) number of certified auditors in an audit firm, personnel remuneration and the ratio of staff to partners.

Authors

• Christophe Van Linden, KU Leuven

• Marleen Willekens, Katholieke Universiteit Leuven