Allies in the Break Room: The Effect of Accounting Alumni on Auditor Choice and the Hiring Agenda

Abstract

Using job history data on accounting employees working at S&P 1500 firms, we study whether firms display a preference for auditors from whom they have more alumni, as well as if auditor selection affects a firm’s subsequent hiring agenda. We find that a one standard deviation increase in an auditor’s alumni rate within a firm increases the likelihood of that auditor being chosen by 5.1 percentage points. This is economically significant given that no single Big 4 firm accounts for more than 31.6% or less than 20.9% of the audits within our sample. Our switch analyses are consistent with these results, suggesting that firms favor auditors from whom they have more alumni when selecting a new external auditor. We also find that firms alter their hiring agenda in favor of the incoming auditor after a switch and that the changes to hiring preferences persist as auditor tenure grows. Robustness tests indicate that these findings are not a result of reverse causality.