Audit Partner Life Cycle and Implications for Audit Quality

• In Event: Audit Partner Quality

Abstract

This study investigates how audit partners’ performance changes at various stages of their professional life cycle in the light of human capital theory. We argue that 1) as audit partners become more experienced, they gradually lose their motivation to continue investing in their human capital, and thereby deliver lower audit quality; and 2) partners, who become directors and consultants after they retire from the audit firms, have higher incentives to invest in their human capital than their peers, and thereby provide higher quality audit services. We find partner life cycle is positively associated with audit fees and the absolute value of total accruals, and curvilinearly associated with the likelihood to issue going-concern opinions. The associations differ for Big N and non-Big N partners. We also find some evidence for the impact of post-retirement work on partner performance. Specifically, Big N partners who engage in director or consulting roles charge higher fees than their non-working colleagues. To our knowledge, this is the first study to provide a cost-benefit analysis of compulsory early retirement policies for accounting firms.

Authors

• Yang Xu, University of Queensland

• Elizabeth Carson, University of New South Wales

• Roger Simnett, UNSW Australia