Do Audit Personnel Salaries Impact Audit Quality?

Abstract

This study examines the relationship between audit personnel salaries and office-level audit quality. Audit personnel are a key input in the audit process and expectations of personnel have been increasing since the inception of the PCAOB. Despite these increased expectations and workloads, audit salaries have remained relatively flat over the past decade. Using salary data collected from H1-b visa applications obtained via the Freedom of Information Act, we measure audit personnel salaries at the Associate, Senior and Manager ranks for local Big 4 audit offices during the years 2004 to 2013. We first examine the determinants of audit personnel salaries finding that some individuals are willing to trade-off higher salaries for the opportunity to work for offices that are local market leaders and have a history of performing high quality audits. We next examine the relationship between audit personnel salaries and office level audit quality finding a negative association. That is, offices that pay lower salaries to its rank-and-file employees tend to have a higher percentage of clients that experience restatements. Finally, we examine the ability of audit offices to pass the costs of audit labor onto their clients. We document positive and significant associations between salary and fees, suggesting that audit offices pass the cost of labor onto their clients. Overall, our findings provide initial evidence on the role of audit salary and its impact on audit quality and audit fees.