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.
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.
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.
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.
Coauthored with: Nicholas Hallman and Jayanthi Sunder
Abstract: Both popular media and academic research have long asserted that the Big 4 audit firms (“the firms”) are “boys clubs” that fail to equitably retain and promote female auditors. Recently mandated Form-AP disclosures have reignited interest in gender disparities at the firms by revealing that, despite their explicit commitments to gender equity, only a small proportion of their public company engagements are led by female audit partners. We use newly available data on nearly 150 thousand rank-and-file auditors to show that these assertions about gender disparities at the firms were historically accurate. Throughout the 1990s and 2000s, female auditors faced lower retention and promotion rates than their male counterparts. These disparities were even more pronounced in auditing than in most other financial services professions. However, we also show that these disparities narrowed among auditors during the mid 2010s and reversed by the late 2010s. Indeed, we present evidence which suggests that from the late 2010s through the end of our sample period in 2023, it was male auditors who were at higher risk of leaving the firms and faced lower probabilities of promotion conditional on staying. The absence of a similar reversal in retention rates for other financial services professions during the same period bolsters our conclusion that the trends observed are not driven by broader industry or labor market factors.
Coauthored with: Vic Naiker and Yakun Wang
Abstract: Motivated by the view that many audit professionals perceive employment at large audit firms as a steppingstone to lucrative appointments in other companies, this study examines how Accounting and Auditing Enforcement Releases (AAERs) issued by the SEC spill over to affect the careers of auditors who are not personally culpable in client misconduct. We find that client AAERs reduce the likelihood that non-culpable audit professionals transitioning to other companies. Tainted audit professionals who transition after a client AAER are less likely to join prestigious companies in the industry and tend to secure lower subsequent salaries compared to peers from unaffected offices. Cross-sectional evidence shows that although greater seniority can cushion these effects, likely due to the experience and networks of senior auditors, client AAERs still diminish their chances of securing senior roles outside the audit profession. In addition, the negative labor market consequences are more pronounced when the AAER is severe or accompanied by negative media coverage. Together, these results show that client AAERs impose substantial contagion effects in the labor market for non-culpable auditors, highlighting the broader implications of client misconduct.