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

49 Pages Posted: 16 Apr 2020 Last revised: 8 Jan 2021

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: December 1, 2020

Abstract

The mandatory retirement age within U.S. Big 4 audit firms ranges from 55 to 62, which has attracted controversy and legal scrutiny. The potential costs of an earlier retirement age include the loss of established networks, experience, and expertise. However, studies in non-U.S. jurisdictions conclude that partners nearing retirement disengage from their work, which manifests in lower audit quality. Using intensive hand-collected data on the age of 3,148 U.S. audit partners, we provide the first evidence of the costs and benefits of mandatory retirement policies at U.S. audit firms. We find that audit quality does not vary, but that fees are significantly higher for U.S. partners approaching retirement. These findings suggest that U.S. mandatory retirement policies are forcing out experienced revenue earners that are producing audit quality equivalent to younger partners. Additional analysis reveal that partner retirements are mechanisms to promote and grow the client portfolios of younger and female audit partners, and therefore increase partner diversity. Our additional analysis of non-U.S. audit partners leading audits of U.S. listed companies shows that partners approaching retirement are associated with lower audit quality across certain measures. This suggests that the audit quality of older U.S. partners is superior to their non-U.S. counterparts.

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 (December 1, 2020). Journal of Accounting and Public Policy, Forthcoming, 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

HOME PAGE: http://www.xbrlresearch.com

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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