Allies in the Break Room: The Effect of Accounting Alumni on Auditor - PowerPoint PPT Presentation

Allies in the Break Room: The Effect of Accounting Alumni on Auditor Choice and the Hiring Agenda Presented by Nam Ho Joint with Andrew Bird and Thomas Ruchti Tepper School of Business Carnegie Mellon University

Research Question and Results • Research Questions: • How do firms choose between similar auditors? • Do firms prefer auditors from whom they have more alumni? (Familiar auditors) • Do firms adjust their hiring practices based on their chosen auditor? • Key Results: • Firms show a strong preference for auditors that they have more alumni from • Firms adjust their hiring agenda in favor of the incoming auditor after making a switch

Incentives • Why might a firm choose to hire/hire from their external auditor based on their employees’ alumni affiliations? • Pros: Trust (Lennox 2005), efficiency (Bird et al. 2016), reputation • Cons: Potential independence concerns, shareholder and public skepticism (Menon and Williams 2004; Naiker and Sharma 2009)

Data • Sample consists of S&P 1500 companies audited by one of the Big 4 during the period of 2009-2013 • Sample contains biographical data on accounting employees working within these firms

Hypotheses and Testing Methodology • Hypothesis 1: Firms prefer auditors from whom they have more alumni • Grouped, auditor specific, and multinomial logit • CHOICE is an indicator variable for if the xx auditor is chosen • xxRATE is the proportion of accounting employees at the firm that are alumni of auditor xx • Controls include specialization indicators, affiliated CFO indicators, firm size, and leverage ratios

Mean Alumni Rates • Each of the Big 4 have a higher mean alumni rate at firms who employ them as their external auditor

Distribution of Alumni Rates • Each of the Big 4 have a larger density of high alumni rate firms using their services (colored bars) than not (clear bars)

Auditor Choice: Grouped and Auditor Specific Logit

Auditor Choice: Partitioned • Partitioned by median number of accounting employees • This result does not replicate when partitioning by firm size, organizational complexity, or corporate governance

Switches • Firms factor in their current employees when switching, this result replicates if alumni rate is used

The Hiring Agenda

Conclusion • Firms show a strong preference for auditors from which they have more alumni, both during switches and in the cross-section • Firms adjust their hiring agenda in favor of the incoming auditor after a switch • Implications: • Audit quality • Auditor growth • Firm culture