Accounting Personnel Quality, Audit Risk, and Auditor Responses

Abstract

Auditing standards and anecdotal evidence suggest that accounting personnel’s lack of financial reporting competencies can increase audit risk. This study draws on human capital theory to measure the quality of accounting personnel based on their education level and obtains evidence of how the quality of accounting personnel affects audit risk through examining audit outcomes. It shows that auditors charge higher fees and are more likely to make audit adjustments to companies whose accounting personnel have a lower level of education. The relationship between accounting personnel’s education and audit fees (audit adjustments) is robust to the propensity score matching approach and stronger in companies with more complex operations. Audit firms strategically assign more experienced partners to audit companies whose accounting personnel have a lower level of education. Taken together, these findings suggest that the quality of accounting personnel affects audit risk and audit outcomes.

Keywords: Human capital, accounting personnel, audit risk, audit fee, audit adjustment

JEL Classification: M40, M42, J01, J24