Audit Personnel Salaries and Audit Quality

• In Event: Auditors' human capital and labor markets

Abstract

This study examines the relation between audit personnel salaries and office-level audit quality. We measure audit personnel salaries at the Associate, Senior and Manager ranks for Big 4 audit offices from 2004 to 2013 using unique individual auditor level data obtained from the U.S. Department of Labor. We find that offices that pay lower salaries have a higher percentage of clients that experience restatements. In related analyses, we also find lower levels of audit quality when audit employees are paid less relative to other lines of service in accounting firms (tax, consulting, etc.). Finally, we examine the ability of audit offices to pass the costs of audit labor onto their clients. We document positive and significant associations between salary and fees, suggesting that audit offices pass some of the cost of higher labor onto their clients. Overall, our findings provide important initial evidence on the role of audit salary and its relation to audit quality and audit fees.

Authors

• Jeffrey Lamro Hoopes, University of No Carolina Chapel Hill

• Kenneth Merkley, Cornell University

• Joseph Pacelli, Indiana University - Bloomington

• Joseph H Schroeder, Indiana University - Bloomington