Audit Personnel Turnover, Auditor Labor Market, and Audit Quality

ABSTRACT Using the resumes of 200,708 individual auditors from LinkedIn to identify audit personnel turnover in the US Big 4 audit offices, we document a higher probability of financial misstatements among clients of offices with higher auditor turnover. This adverse effect is driven by both busy‐season turnover and voluntary turnover. This effect is also more pronounced when the departing auditors are more experienced and skilled as well as when their offices have less industry expertise, suggesting that the loss of knowledge and skills is one driving force behind turnover‐induced audit quality deterioration. Workload compression serves as another driving force, as the detrimental role of auditor turnover concentrates on offices with more complex clients and more accelerated filers. More importantly, we find that audit offices respond to high auditor turnover directly through internal and external hiring and indirectly through adjusting compensation and promotion schemes, as lower relative salary, higher wage inequity, and lower likelihood of promotion positively affect auditor turnover. We further show that both direct and indirect responses can effectively improve future audit quality. Overall, our results provide insights into audit personnel turnover and human capital management in the United States and suggest that human capital disclosures can help stakeholders evaluate the quality of audit offices’ services.