Employee Movements from Audit Firms to Audit Clients

57 Pages Posted: 1 Feb 2018

See all articles by Andrew Finley

Andrew Finley

Claremont McKenna College - Robert Day School of Economics and Finance

Mindy (Hyo Jung) Kim

George Mason University, School of Business

Phillip T. Lamoreaux

Arizona State University

Clive S. Lennox

University of Southern California

Date Written: January 1, 2018

Abstract

Regulators have expressed concerns about the “revolving door” between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires”). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company’s financial statements. We expand the scope of the analysis by examining employees who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company’s financial statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover. There is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment. We also predict and find that both direct and indirect alumni hires are associated with lower rates of audit firm turnover. However, there is little evidence that these hires result in lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms as they reduce the incidence of costly turnover.

Keywords: auditors, executive selection, auditor turnover, executive turnover

JEL Classification: J63, M12, M42

Suggested Citation

Finley, Andrew and Kim, Hyo Jung and Lamoreaux, Phillip T. and Lennox, Clive, Employee Movements from Audit Firms to Audit Clients (January 1, 2018). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 3108778. Available at SSRN: https://ssrn.com/abstract=3108778 or http://dx.doi.org/10.2139/ssrn.3108778

Andrew Finley

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

Hyo Jung Kim

George Mason University, School of Business ( email )

4400 University Drive
Fairfax, VA 22030
United States

Phillip T. Lamoreaux (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287
United States

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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