Do consulting services affect audit quality? Evidence from the workforce

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