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Although many firms are concerned about the difficulty in hiring, training, and retaining qualified staff, the human capital of rank-and-file employees is difficult to measure, and its link to a firm’s financial reporting quality (FRQ) thus remains largely an open question. We use novel time-series data on employee flows to examine their predictability of FRQ. We find that accounting-employee flows during the first half of the year are positively associated with firms filing annual reports late, disclosing internal control weaknesses, and restating their financials. These results are concentrated in firms with greater reporting complexity and in firms with lower workforce morale. We also find that accounting-employee flows lead to higher audit fees. We employ firm fixed effects, entropy balanced matching, and placebo tests to rule out alternative explanations. Our study provides new evidence that employee instability within a financial reporting department can be a salient indicator of FRQ as it has strong predictive ability of the quality and cost of a firm’s financial reporting output.
Zhiru Lin, University at Buffalo, SUNY
Michael Dambra, University at Buffalo, SUNY
Joshua Khavis, University at Buffalo, SUNY