The Role of Tacit Knowledge in Auditor Expertise and Human Capital Development

Abstract

Two critical aspects of the model of auditor expertise development in Tan and Libby [1997] are that audit firms do not value tacit knowledge in inexperienced auditors but do value it in experienced auditors. We update the former and extend the latter. Our paper predicts and finds that audit firms now do value tacit knowledge in inexperienced auditors, especially when their supervisors have higher tacit knowledge. Our proxies of value include higher promotability assessments, annual evaluations, and cash bonuses. Our paper also extends Tan and Libby [1997] by positing that enhanced development of expertise and audit firm human capital are two reasons audit firms value tacit knowledge in experienced auditors. As predicted, higher tacit knowledge in experienced auditors is positively associated with higher tacit knowledge acquisition by their inexperienced subordinates and with stronger firm commitment of inexperienced subordinates having higher tacit knowledge.

Talent identification and development

“…In addition, team integration and commitment to the firm also play a role in the rating outcome. The last point has also recently been addressed by Bol et al (2017), who find a positive association between supervisors' managerial ability and their subordinates' level of commitment to the firm. This clearly illustrates that the supervisor is able to support her subordinates beyond improving simple job performance.…”

“…A supervisor uses her greater experience to develop her subordinates, and depending on the level of performance, the subordinates have either more or less to absorb from their supervisors (Scandura and Schriesheim 1994). That is, young professionals acquire knowledge and skills from their supervisors, and gradually build up their own knowledge and skills to master their job (Bol et al 2017;Westermann et al 2015).…”

“…A field study conducted by Dineen et al (2006) indicates that by providing guidance to subordinates, supervisors are able to induce greater levels of organizational citizenship and less deviant behavior, which in turn enhances firm performance (Podsakoff et al 1997). Along these lines, Bol et al (2017) find that supervisors high on tacit knowledge are better in developing subordinate competencies and fostering their commitment to the firm. In a similar vein, research focusing on the positive effects of mentoring programs shows that mentored employees, compared to their non-mentored counterparts, are more integrated into the organization, receive higher salaries (Chao et al 1992), indicate a higher job satisfaction, receive more promotions (Fagenson 1989), increase job learning, and are less likely to leave the firm (Lankau and Scandura 2002).…”

“…That is, while the supervisor might be willing to provide feedback, she might lack the expertise and job know-how to fill the feedback with valuable content and advice that helps the subordinate to develop into the right direction. For example, Bol et al (2017) show that supervisors who lack knowledge that is crucial in their position fail to develop this type of knowledge in their subordinates, which not only hurts subordinates' development for the future but also hurts subordinates' performance in the current job. Hence, I examine the supervisor's performance evaluation and feedback behavior and her own performance level in her job as complements in stimulating subordinate development.…”

“…Especially in the context of leadership development, the lack of communication and interpersonal skills has been recognized as a frequent threat to effective work relationships with subordinates and colleagues, and is therefore on the priority list of organizations when selecting supervisors (Riggio and Lee 2007;Robles 2012). The weight on interpersonal skills when choosing a supervisor candidate can also be explained in the light of recent findings of Bol et al (2017). They demonstrate that high tacit knowledge supervisors are able to cultivate tacit knowledge in their subordinates and foster their commitment to the firm, both being relevant for creating firm value (Hitt et al 2001;Cortes 2016;Raffiee and Coff 2016).…”