Manager Staffing Leverage at the Audit Office and Audit Quality

Abstract

The Public Company Accounting Oversight Board (PCAOB) posits that manager staffing leverage, primarily through greater manager availability and oversight, is an important audit quality indicator and performance metric. We test this notion by empirically examining the link between manager staffing leverage, as measured by the manager-to-employee ratio at the audit office, and audit client outcomes from 2008 to 2019. We find manager staffing leverage is associated with lower client misstatement rates, suggesting higher audit quality. When disaggregated, the association pertains to middle managers but not to partners. This relation is stronger for more important and more complex clients and for offices that experience high growth, offer greater career opportunities, and better compensate their auditors. We also find that manager staffing leverage measured at the firm level predicts audit quality, suggesting that firm-provided workforce data may be useful for inferring audit quality. Managerial leverage is also linked to higher costs in the form of higher audit fees and longer audit lags. Finally, we document that auditors with higher manager leverage are less likely to be dismissed by important clients, suggesting offices with greater manager leverage are better equipped to maintain important relationships by strategically allocating their managerial staff. 

Keywords: auditor human capital, staffing leverage, audit quality, audit fees, audit lag, auditor switching