Employee Movements from Audit Firms to Audit Clients

Abstract

Regulators have expressed concerns about the “revolving door” between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires”). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company’s financial statements. We expand the scope of the analysis by examining employees who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company’s financial statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover. There is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment. We also predict and find that both direct and indirect alumni hires are associated with lower rates of audit firm turnover. However, there is little evidence that these hires result in lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms as they reduce the incidence of costly turnover.