Do consulting services affect audit quality? Evidence from the workforce

55 Pages Posted: 6 Jan 2023 Last revised: 11 Apr 2024

See all articles by Anastassia Fedyk

Anastassia Fedyk

University of California, Berkeley - Haas School of Business

Tatiana Fedyk

University of San Francisco

James Hodson

AI for Good; Cognism; Jožef Stefan Institute

Natalya V. Khimich

Drexel University

Date Written: February 23, 2024

Abstract

This paper investigates how consulting services affect audit quality, from the perspective of knowledge and expertise sharing between employees. Using a comprehensive office-level dataset of employment profiles covering 86% of all employees at large U.S. public accounting firms, we document a positive effect of consulting employees on audit quality. Specifically, a one-standard-deviation increase in the share of consulting employees in an office results in a 2.6 percentage point reduction in restatements (a decrease of 19% relative to the baseline). This effect is strongest when consulting employees have skills complimentary to auditors, such as technical, HR, and specific-industry skills, especially in cases when consultants have expertise in the same industry as the audit client. Our findings are supported by interviews with 16 audit partners revealing that consulting expertise is used in 60%-80% of audit engagements, and that the main rationale for such collaboration is knowledge sharing and improved audit quality.

Keywords: Consulting; Employee skills; Skill complementarity; Audit quality; Labor effects

JEL Classification: D22, E24, J24, M42

Suggested Citation

Fedyk, Anastassia and Fedyk, Tatiana and Hodson, James and Khimich, Natalya V., Do consulting services affect audit quality? Evidence from the workforce (February 23, 2024). Available at SSRN: https://ssrn.com/abstract=4318287 or http://dx.doi.org/10.2139/ssrn.4318287

Anastassia Fedyk (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Tatiana Fedyk

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

James Hodson

AI for Good ( email )

800 Arlington Boulevard
El Cerrito, CA 94530
United States
9177449036 (Phone)
9177449036 (Fax)

HOME PAGE: http://ai4good.org

Cognism ( email )

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London, SE17TT
United Kingdom

HOME PAGE: http://cognism.com

Jožef Stefan Institute ( email )

Jamova cesta 39
Ljubljana, 1000
Slovenia

HOME PAGE: http://ailab.ijs.si

Natalya V. Khimich

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

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