The Costs and Benefits of Retirement Policies at U.S. Audit Firms

55 Pages Posted: 16 Apr 2020

See all articles by Jenna Burke

Jenna Burke

University of Colorado at Denver

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Xia Xiao

Northeastern University - Accounting Group

Date Written: March 1, 2020

Abstract

The mandatory retirement age within U.S. audit firms ranges from 55 to 62, which has resulted in both controversy and legal scrutiny. The potential cost of requiring partners to retire at an age that is far younger than in other countries and related professions is the loss of their connections, experience, and expertise. Yet, studies in non-U.S. jurisdictions consistently find a negative association between audit partner age and audit quality, which is explained by partners nearing retirement disengaging from their work. Using hand-collected data on the age of 3,148 U.S. and 432 non-U.S. audit partners that conduct audits of U.S.-listed companies, we explore the costs and benefits of mandatory retirement policies at U.S. audit firms. We find that audit quality does not vary across U.S. partner age, but that non-U.S. partner age is associated with a higher likelihood of misstatements. Across both groups, older partners charge significantly higher fees. These findings suggest that U.S. mandatory retirement policies force out experienced revenue earners that are producing audit quality equivalent to younger partners and superior to similarly aged non-U.S. partners. We conduct additional analysis and find that partner retirements are mechanisms to promote and grow the client portfolio of younger and female audit partners.

Keywords: PCAOB, Form AP, audit partner, partner characteristics, age, mandatory retirement

JEL Classification: M42, G18, G28, J16

Suggested Citation

Burke, Jenna and Hoitash, Rani and Hoitash, Udi and Xiao, Xia, The Costs and Benefits of Retirement Policies at U.S. Audit Firms (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3559503 or http://dx.doi.org/10.2139/ssrn.3559503

Jenna Burke (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

Xia Xiao

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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