Opening the Black Box of Audit Quality: The Effect of Individual Auditor Quality on Audit Outcomes

58 Pages Posted: 28 Jan 2017 Last revised: 8 Nov 2017

See all articles by Derrald Stice

Derrald Stice

University of Hong Kong - Faculty of Business and Economics; HKU - Accounting Area - Faculty of Business and Economics

Han Stice

The Chinese University of Hong Kong

Roger M. White

Arizona State University (ASU) - School of Accountancy

Date Written: August 2017

Abstract

This study examines the effect of individual auditor quality (below the partner level) on overall audit quality. We aggregate audit employee-level performance evaluations to create a measure of auditor quality at the office level. We find that high quality audit offices are associated with a lower likelihood of client restatement, fewer client abnormal accruals, and a higher likelihood of a client receiving a going concern opinion. We partition employees into low, medium, and high level, based on job title, in order to investigate which employee levels drive these results. We find that the restatement results are driven by high quality high-level employees (Senior Managers/Directors), while the going concern results are driven by high quality low-level employees (Seniors). Furthermore, we find evidence that high quality audit teams are associated with all aspects of audit quality and the magnitude of these team effects are much larger than those of the effects for any individual employee type. These findings are consistent with higher-level auditors preventing the most serious financial statement deficiencies, low-level employees contributing to audit firm independence, and overall team quality creating synergy which has the strongest effect on all aspects of audit quality. Overall, our empirical results suggest that individual auditor quality is associated with higher quality audits, and that employees at all levels affect audit outcomes.

Keywords: Employee Performance Evaluations, Big N Auditors, Audit Quality, Restatements, Individual Auditor

JEL Classification: G01, M4, M49

Suggested Citation

Stice, Derrald and Stice, Han and White, Roger M., Opening the Black Box of Audit Quality: The Effect of Individual Auditor Quality on Audit Outcomes (August 2017). Available at SSRN: https://ssrn.com/abstract=2907184 or http://dx.doi.org/10.2139/ssrn.2907184

Derrald Stice

University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong, HK
China

HKU - Accounting Area - Faculty of Business and Economics ( email )

Hong Kong

Han Stice (Contact Author)

The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong

Roger M. White

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

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