Inside Audit Firms

Abstract

We develop and test hypotheses about compensation policy and auditor retention in accounting firms. Our analyses use de-identified employment and compensation data to investigate the entire pay distribution within accounting firms. Accounting firms all have low retention rates but exhibit differing pay structures. Big 4 firms give similar raises within each cohort, while non-Big 4 give substantial raises to a few top performers. Auditors often "move up" to Big 4 firms, but relatively few move the other way. Audit fees are consistently related to compensation structure. Overall, our results suggest that compensation policies in professional accounting firms affect auditor behavior.