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Allies in the Break Room: The Effect of Accounting Alumni on Auditor Choice and the Hiring Agenda

56 Pages Posted: 20 Oct 2015 Last revised: 17 Mar 2016

Andrew Bird

Carnegie Mellon University - Tepper School of Business

Nam Ho

Carnegie Mellon University - David A. Tepper School of Business

Thomas G. Ruchti

Carnegie Mellon University - Tepper School of Business

Date Written: March 2016

Abstract

Using job history data on accounting employees working at S&P 1500 firms, we study whether firms display a preference for auditors from whom they have more alumni, as well as if auditor selection affects a firm’s subsequent hiring agenda. We find that a one standard deviation increase in an auditor’s alumni rate within a firm increases the likelihood of that auditor being chosen by 5.1 percentage points. This is economically significant given that no single Big 4 firm accounts for more than 31.6% or less than 20.9% of the audits within our sample. Our switch analyses are consistent with these results, suggesting that firms favor auditors from whom they have more alumni when selecting a new external auditor. We also find that firms alter their hiring agenda in favor of the incoming auditor after a switch and that the changes to hiring preferences persist as auditor tenure grows. Robustness tests indicate that these findings are not a result of reverse causality.

Keywords: Auditor choice, auditor retention, former employees, accounting alumni, affiliations, hiring

Suggested Citation

Bird, Andrew and Ho, Nam and Ruchti, Thomas G., Allies in the Break Room: The Effect of Accounting Alumni on Auditor Choice and the Hiring Agenda (March 2016). Available at SSRN: https://ssrn.com/abstract=2676412

Andrew Bird (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

Pittsburgh, PA 15213-3890
United States

Nam Ho

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Thomas G. Ruchti

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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