Are good auditors born or groomed? Evidence from BigN audit partners who got their start at a Non-BigN audit firm

• In Event: Auditor Expertise and Style

Abstract

This paper investigates the question of whether good audit partners are born or groomed. I identify Bign engagement partners who began their careers at a Non-Bign audit firm (i.e. Start-nBign) and compare their audit partner quality and pricing relative to other Bign engagement partners who have spent their entire careers at Bign audit firms. Using prior Non-Bign experience as a plausible proxy for ex-ante less qualified audit partners, I investigate whether these lower quality auditors can grow into high quality audit partners or if the influence of lower talent persists throughout the partners’ careers. Using manually hand-collected data on audit partner demographic, educational, and experiential characteristics from LinkedIn, I find that audit partners who started at a Non-Bign audit firm provide higher quality audits and are associated with higher audit and abnormal audit fees. These effects are driven by these partners’ constraint of clients’ income-increasing accruals. I also find that clients switching to Start-nBign audit partners reduce performance adjusted discretionary accruals relative to those clients switching away from Start-nBign audit partners, confirming their association with improved audit quality. These partners are less likely to be busy partners and when they are their audit quality suffers less than those in the control sample. Overall, my findings suggest a competitive differentiation strategy by Start-nBign partners to focus on fewer, better quality audits. This evidence is supported by Start-nBign client assignments of more within audit firm complicated clients, consistent with a higher within audit firm reputation for Start-nBign partners.

Author

• Joseph Micale, New Jersey Institute of Technology