Do consulting services affect audit quality? Evidence from the workforce

Abstract

There is a long-standing question in the literature about whether and how consulting services in audit firms affect audit quality. We address this question by using a unique and comprehensive office-level dataset of employment profiles and skills, covering approximately 86% of all employees at large U.S. public accounting firms. We guide our empirical analyses with interviews with 15 audit partners, which reveal that consulting expertise is used in approximately 60%-80% of audit engagements, and the main rationale for such collaboration is knowledge sharing and improved audit quality. In our empirical analyses, we document a positive effect of consulting employees on audit quality. Specifically, one standard deviation increase in the share of consulting employees in an office results in a 2.7 percentage point reduction in restatements in that office. This effect is strongest when consulting employees have skills complimentary to auditors, including special industry skills, technical skills and management skills, supporting the knowledge sharing hypothesis. In addition, we demonstrate that the effect increases with of consulting employees’ tenure with a firm, does not diminish over time, is present for both Big4 and non-Big4 firms, and is more pronounced for larger, more complex and more important audit clients.