PurposeFollowing the high profile collapses of Enron and WorldCom, and the demise of Andersen, human capital (HC) has become a key driver of auditor quality. The purpose of this study is to investigate if there is a positive association between HC and auditor quality in public accounting firms and if the extent of association varies between accounting firms.Design/methodology/approachMultiple regression and logistic modeling are applied to examine the association between auditor quality and HC. The sample consists of 4,865 firm‐year observations over the period from 1989 to 2004.FindingsThe main findings indicate that higher investments in HC correspond to a higher level of auditor quality. Furthermore, the power of HC on auditor quality has a significant difference between public and non‐public audit market firms.Research limitations/implicationsA number of theoretical and measurement limitations are acknowledged that could further increase the statistical power of the tests.Practical implicationsThe findings should be of interest to regulators, auditors, audit clients, and academics. The findings also suggest that HC has an impact on overall auditor quality. The audit firms need more well‐educated and well‐trained professionals with the experience to keep pace with the changing nature of the market and to perform audit tasks.Originality/valueThe findings fill a gap in the literature regarding auditor quality and HC from the perspective of public accounting firms.

In defining audit quality, DeAngelo (1981) assumes no variation in auditor's technical competency in discovering a breach. Instead, we relax this assumption and utilize principal components analysis technique to extract auditor quality from human capital factors of an audit firm. With the auditor quality, this study examines the association between auditor size and performance. In terms of market segment, audit firms are divided into public company audit market firms (PCAMFs) and non-public company audit market firms (NCAMFs). Based on path analysis, we find that auditor size has direct effect on performance and indirect effect through auditor quality. Auditor quality associates with both auditor size and performance positively. In further, auditor size has more contribution to performance of PCAMFs than that of NCAMFs. Auditor quality of PCAMFs explains more variation of financial performance than do NCAMFs. The results indicate that PCAMFs earn more financial performance through the upgrade of auditor quality.

Auditing has been identified as an area of immense importance for the development of China's stock market. Auditing not only provides reliable information for users, but, more importantly, it must coordinate the potential interests among the public, central and local state, and the nation. This study investigates the association between the auditing value and earnings management risk (EMR) induced by security regulation. It is hypothesized that, from the perspective of risk premiums, the auditing value increases as the EMR increase. Using a sample of 4,594 Chinese listed firms during 2001 to 2006, we find that auditing value is positively associated with EMR. We also find that different types of security regulation affect the auditing value. The results are robust to different model specifications and alternatives sample. Apart from providing some new evidence in the important area of auditing value, we also reveal interesting implications for auditing profession, regulators, entrepreneurs, and investors.