Insights

Recently, PwC has been embroiled in the financial fraud scandal involving Evergrande Real Estate, which has severely impacted its auditing operations in the A-share market. The firm is currently facing a persistent trend of setbacks and a series of contract losses, raising alarms about the potential attrition of its auditing talent and attracting widespread public attention.

The auditing sector is one that heavily relies on human capital, where the accumulation of audit experience and relevant knowledge skills is essential for maintaining audit quality and managing audit risk effectively. However, high turnover rates have become a common phenomenon within this industry. According to the latest research, the annual turnover rate for audit offices of the Big Four accounting firms in the United States is approximately 23.6%, meaning that around one out of every four auditors will leave within the same year. Could this high turnover rate pose a potential threat to audit quality? 

Professor Wang Yakun from the School of Economics and Management, The Chinese University of Hong Kong, Shenzhen, along with collaborators, conducted a research titled "Individual Auditor Turnover and Audit Quality – Large Sample Evidence from U.S. Audit Offices," which focuses on the turnover rates of auditors in the industry and examines the relationship between auditor attrition at the Big Four accounting firms and audit quality. Recently, this paper has been accepted by the top international journal, The Accounting Review.

Author

Wang Yakun

Assistant Professor, School of Management and Economics, CUHK-Shenzhen

Research Area

Product Market Relations, International Capital Markets, News Disclosure, Stakeholders

Abstract

We examine the relationship between audit quality and office-level auditor turnover. Using resumes of over 106,000 Big 4 auditors, we find that audit offices with higher turnover have a greater likelihood of client annual report restatements. This detrimental effect is more pronounced when the departing auditors are more experienced, when the office faces tighter human capital constraints, and is primarily attributable to voluntary turnover. Further, such negative effect is borne mostly by complex clients and intangible-intensive clients but is weakened for clients with greater product similarity to the client portfolio of the audit office. Last, the impact of office-level turnover on audit quality persists after controlling for firm-level turnover. Our findings inform the current policy debate on whether and to what extent audit firms should disclose auditor turnover as a potential indicator of audit quality.