Are Audit Personnel Salaries Related to Audit Effectiveness and Efficiency?

Huang, Julie
Ettredge, Michael
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Among all the factors influencing audit input, audit personnel is one of the most important, as each factor of audit input is directly related to competent and talented people. Using auditor salary as a proxy for audit personnel quality, I hypothesize and find that higher personnel quality leads to better audit output. First, clients of auditors paying higher salaries have higher audit quality, as evidenced by a lower likelihood of a future restatement of current year’s financial statements, lower discretionary accruals, and a lower likelihood to receive a failed internal control over financial reporting (ICFR) opinion. Moreover, higher-paid auditors earn higher audit fees and are more likely to become national and city-level leaders in a specific industry. The cross-sectional analysis finds that the positive effect of personnel quality on audit outcomes is more pronounced for the audit offices having a steady growth in industry market shares. Collectively, these results are consistent with higher-cost audit inputs leading to better audit output.
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personnel salary, audit quality, audit fee, industry leadership
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