The Costs and Benefits of Retirement Policies at U.S. Audit Firms
55 Pages Posted:
Date Written: March 2020
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: Suggested Citation