The association between auditor quality and human capital

Abstract

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.

Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Concept Release on Audit Quality Indicators, No. 2015-005, July 1, 2015

“…Using data from audit engagements performed in The Netherlands, Van Buuren and Causholli (2015) also find strong evidence that partner industry specialization is associated with a greater likelihood of detecting misstatements, and partners with greater industry specialization are more likely to discover misstatements that are subjective in nature, and are more likely to issue modified opinions. Education, experience with the Big N, qualification, and continued education and training have also been shown to positively affect audit quality (Gul, Wu, and Yang 2013;Chen, Liu, and Chien 2009). Academic research in general supports the design and implementation of a dynamic and market-driven accounting and business curricula to educate and train the next generation of accountants with a keen focus on diversity and ethics in the accounting profession.…”

Audit quality in ASEAN region: some efforts and comparisons

“…Another effort which the regulators have committed to meet the challenges of the changes in the auditing profession and may increase the AQ is by having CPD program [22]. The objective is to encourage the culture of continuous learning among professionals [21].…”

The mediating role of human capital on the relationship between audit firm size and independent auditor’s opinion: evidence from Iranian audit firms

“…Some authors in their various studies suggested the examination of the effect of HC on IAO. Cheng et al (2009) revealed that HC has been considered as valuable assets in the public accounting firms. Thus, Public accounting firms should train employees to work as per legal requirements, standards and public's anticipations.…”

“…Gray and Manson (2005) agreed with Dang (2004) when he stated that the role of an auditor is to monitor, secure accountability and provide unbiased opinions. Besides, the public concern about auditor's report has been shifted from audit firms to auditee companies, as according to Cheng et al (2009), the auditors' quality to fulfil their responsibilities is a part of their characteristics.…”

“…Thus, Public accounting firms should train employees to work as per legal requirements, standards and public's anticipations. They ought to ensure that employees are provided with the desired expertise and professional skills (Cheng et al, 2009). On the other hand, employees also expect the companies to develop a comprehensive human resource plan.…”