The Dark Side of Auditor Pay Disparity: Evidence from Audit Adjustments

Abstract

This study examines the relation between auditor pay disparity and audit adjustments, and finds that offices with higher pay disparity are associated with lower magnitudes of audit adjustments. Further analysis suggests that the negative influence on audit adjustment is mainly driven by abnormal pay disparity, and the results are consistent with the view of Equity Theory that pay disparity leads to employees having feelings of resentment and shirking their duties, thereby further harming auditors’ work performance. In additional tests, we find that the association between pay disparity and audit adjustments is more pronounced when auditors bear greater economic pressure in life or when auditors contribute a higher per capita revenue to the office. Moreover, we find that audit offices could relieve the negative effects of pay disparity by providing low-level auditors with higher salary and more opportunities for accumulating human capital. Overall, our study provides important evidence on the role of pay disparity regarding audit outcomes and enriches the literature on auditor compensation.

Keywords: pay disparity, pay dispersion, audit quality, audit adjustment, compensation, equity theory

JEL Classification: M40, M42, M52