Delegated Leadership at Public Accounting Firms

Abstract

Public accounting firms are owned and controlled by all equity partners but, in practice, many leadership decisions are delegated to a smaller team of managing partners. Using novel data from China, our study examines which equity partners are selected (not selected) for national leadership positions at their firms. We find that partners are selected as leaders after they have accumulated significant experience in public company auditing and large equity stakes in their firms. We find no evidence that partners are appointed as leaders based on their ability to generate abnormally high fees from clients. We predict (and find) a positive association between a firm’s audit quality and the leadership team’s past experience in public company auditing. However, a firm’s audit quality is not significantly related to other attributes of the leadership team, such as team size, equity ownership, or gender composition.