That's What Friends are for: Audit Quality and Accounting Employee Affiliations with Audit Firms

The auditor‐to‐client revolving door: A structured literature review

“…As demonstrated in Table , the evidence suggests that the most common research theme is the employment of an ex‐auditor and independence (18 articles), which represents 38% (e.g., Ahmad, ; Dart & Chandler, ; Koh & Mahathevan, ), followed by the employment of an ex‐auditor and earnings quality (eight articles), which represents 17% (e.g., Baber et al, ; Geiger et al, ). Four articles looked at the employment of an ex‐auditor and audit quality (Bird, Ho, Li, & Ruchti, ; Lennox, ), while seven papers focused on the benefits of employing an ex‐auditor (e.g., Beasley, Carcello, & Hermanson, ; Iyer & Raghunandan, ).…”

“…Our analysis results show that the most commonly and equally employed methods were archival (L3;e.g., Baber et al, ; Basioudis, ; Bird et al, ; Lennox, ; Menon & Williams, ; Ye et al, ) and survey/questionnaire/other empirical (L1;e.g., Ahmad, ; Dart & Chandler, ; Imhoff Jr., ; Iyer & Raghunandan, ; Kaplan & Whitecotton, ; Parlin & Bartlett, ), with 62%, representing almost two‐thirds of the ARD available research. Next, experimental methods (L4;e.g., Abbott et al, ; Martinov‐Bennie et al, ; Wilson, , ; Wright & Booker, ) represented 19%.…”

“…Data from large databases, such as the Audit Analytics database, EDGAR, COMPUSTAT, Lexis‐Nexis, IBES, and CRSP, were used. For instance, Bird et al () conducted an archival study using a dataset consisting of biographical data on over 63,000 accounting employees working at S&P 1500 companies who had been previously employed at public accounting firms to study the effect of alumni affiliations on audit quality. They used COMPUSTAT as the source for company financial data, publicly available professional networking websites for employee information, and the Audit Analytics database for auditor change data.…”

“…We found that the most popular category in literature focus was auditor independence (N1), with 51% of all articles (e.g., Ahmad, ; Baber et al, ; Sori & Mohamad, ). The second (13%) literature focus was on earnings quality and audit quality (N3;e.g., Bird et al, ;Dowdell & Krishnan, ; Geiger et al, ). Next, an equal number of papers, 11%, were classified as auditor–client relationships (N2;e.g., Beasley et al, ; Firth, ; Ye et al, ) and as mixed (N4; Lennox, ; Menon & Williams, ; Naiker et al, ).…”

“…Audit quality (N3), as measured by both material misstatements and absolute abnormal accruals, was evidenced to be negatively affected by having auditor alumni among accounting employees in the company (Bird et al, ). Other studies (Dowdell & Krishnan, ; Geiger et al, ) examined the effect of revolving‐door appointments on earnings quality but did not find an association.…”