WORKING PAPERS

When Employees Go to Court: Employee Lawsuits and Talent Acquisition in Audit Offices

Solo-authored

Abstract: I examine whether employee-initiated lawsuits against an audit office adversely affect its ability to attract high-quality talent and deliver quality audits. I posit that employee lawsuits erode prospective employees’ perceptions of an office, diminishing their willingness to join. Using a comprehensive dataset of individual auditor profiles, I find a decline in the quality of newly hired auditors following an employee lawsuit. Cross-sectionally, the adverse effect of employee lawsuits on talent acquisition is more pronounced when an office is undergoing higher growth and when a case receives greater media attention. Conversely, this adverse effect is less pronounced when an audit office is larger or offers more competitive wages within the local area. When an audit office is unable to recruit high-quality talent, its audit quality is likely to suffer. Consistent with this, I find a deterioration in audit quality provided by an office following an employee lawsuit. Overall, this study underscores the importance of human capital management and employer reputation for audit offices that operate in competitive labor markets.

Air Pollution in the United States and Misstatements in Financial Reporting

Coauthored with: Paul Michas, Dan Russomanno, and Wenzi Zhuang

Abstract: We argue air pollution can jointly impede the quality of work performed by a client’s financial reporting personnel and its auditor. We exploit PM2.5 data from the Environmental Protection Agency and find a positive association between air pollution and misstatements in annual financial reports. Moreover, we find this association using a subsample where auditors must travel a significant distance to their client’s headquarters and accordingly, are more likely to be exposed to a change in air pollution. Finally, our main finding is more salient when both a client’s reporting personnel and its auditor are likely to be present on site, as well as in more complex engagements where the physical and cognitive demands placed on a client’s reporting personnel and its auditor are likely higher. We interpret this evidence as air pollution impeding the quality of work performed by a client’s reporting personnel, its auditor, or both. 

The Impact of National Office Governance on Audit Quality 

Coauthored with: Preeti Choudhary

Abstract: We investigate whether national office governance is associated with audit quality provided by local audit offices. We proxy for national office governance using two measures of geographical proximity, distance and frequent, direct airline routes between a practice office and the national office of the firm, where the latter introduces exogenous variation. We predict and find closer proximity strengthens national office governance through more monitoring and knowledge transfer, resulting in better audit quality, captured by lower propensity of restatements. Cross-sectional analyses confirm that the relation varies with national office’s sensitivity to costs. Finally, we find that smaller audit firms benefit less from national office governance, consistent with theory that suggests smaller partnership structures have less moral hazard costs and less knowledge transfer benefits from national office governance. Collectively, our results help to explain one avenue that develops audit quality within audit firms.

Does Verification of Internal Control over Financial Reporting Affect Voluntary Disclosure?

Coauthored with: Preeti Choudhary, Aditi Khatri, and Shyam Sunder

Abstract: We investigate whether firms and investors view the presence of the audit of internal controls over financial reporting (ICFR verification) as enhancing the likelihood and credibility of voluntary disclosures. We do so by exploiting a recent amendment to Smaller Reporting Company Regulatory Relief and Simplification in 2018 that generated a sample of firms that are both exempt from mandatorily disclosing certain items in their periodic filings (i.e., move to a voluntary disclosure regime) and are subject to ICFR verification. By comparing this sample to firms that are not subject to ICFR verification but also voluntary disclosers, we find that firms subject to ICFR verification are more likely to voluntarily disclose exempt items. Further, a difference-in-differences design reveals that investors on average view ICFR verification as a substitute for loss of commitment when firms move from mandatory to voluntary disclosure regime but continue to disclose. However, investors do not view ICFR verification as a substitute for loss of information for firms that reduce disclosure, rather they penalize them. Taken together, our findings contribute to an ongoing debate about the costs and benefits of ICFR verification.

The Retention and Promotion of Female Auditors at Big-4 Accounting Firms

Coauthored with: Nicholas Hallman and Jayanthi Sunder

Abstract: Each of the “Big 4” accounting firms has established an explicit goal of reaching gender parity among their employees - particularly among employees in senior positions. Using a dataset consisting of the career histories of more than 91 thousand unique auditors spanning several decades, we examine the firms’ progress towards this goal by tracking gender differences in auditor retention and promotion. Consistent with concerns expressed both in the press and in prior academic research, we find that women were historically more likely than men to leave the Big 4 firms. We also find that, conditional on staying in the Big 4 firms, women were less likely to be promoted. However, the gender differences in retention and promotion diminished in the early 2010s and either disappeared (in the case of promotion) or reversed (in the case of retention) by the late 2010s. The elimination (reversal) of the female promotion (retention) disadvantage was driven in part by the adoption of equalized paternal leave policies at three of the Big 4 firms, and has led to near gender-parity at all ranks below partner/director, to full parity at the penultimate rank of senior manager, and to a sharply increasing trend in the proportion of female partners and directors. Paradoxically, the gains in female retention and promotion have occurred concurrently with a decline in female representation among starting cohorts of staff auditors.