Audit-Employee Turnover, Audit Quality, and the Auditor-Client Relationship

Abstract

Although the PCAOB and the Center for Audit Quality have raised concerns about the negative consequences of audit-employee turnover on audit quality (PCAOB 2015; CAQ 2019), these consequences remain largely undocumented due to data limitations. We use novel data to measure how audit-employee turnover within individual offices of accounting firms explains audit quality and the auditor-client relationship. We document a negative association between audit-employee turnover and audit quality, as measured by restatements, absolute discretionary accruals, AAERs, and going concern opinions. We find that offices experiencing high turnover charge higher audit fees but accelerate audit completion, suggesting decreased audit effort. We also find that clients are more likely to switch auditors in the following year when audit-employee turnover is high. We further find that the impact of turnover varies by employee rank and is more severe for turnover that occurs earlier during the audit cycle.

Keywords: audit-employee turnover, audit quality, auditor turnover, auditor switching, audit fees, human capital

JEL Classification: G28, G38, J63, M12, M41, M49