The Importance of Social Capital to Individual Auditors

Abstract

We examine the role that individual auditors’ social capital plays in their audit quality, client acquisition activities, and career advancement. Our analysis focuses on social capital stemming from educational ties, as measured by the size of an auditor’s university alumni network among those who hold the posts of board chairpersons, CEOs, or CFOs of public companies. We posit that such social connections widen individual auditors’ scope to access information and potential clients, which, in turn, should facilitate their professional development as well as engender higher audit quality. Consistent with our predictions, we find that individual auditors with more social capital: (i) provide higher-quality audits; (ii) attract a larger client base as well as larger audit fees; and (iii) exhibit a higher likelihood of moving to a higher quality audit firm and a lower likelihood of leaving public accounting altogether. Additional evidence implies that auditors enjoy these benefits irrespective of whether they have direct social ties with the client’s top executives. Extensive sensitivity analysis helps dispel concerns that alternative explanations are responsible for our core results.

Keywords: individual auditors, social capital, alumni network, audit quality, client acquisition, career path

JEL Classification: M42, M51