High-Quality Rank and File Employees and Financial Reporting Outcomes

Abstract

We examine whether high-quality rank and file (i.e., non-executive) employees are associated with improved financial reporting outcomes. We argue that high-quality rank and file employees provide better information for executives to use when making reporting choices, and that these employees are better able to identify and uncover intentional financial misreporting, perhaps before it even develops into a larger misreporting event. We use the average education level of the workforce in MSA(s) where the firm operates as a proxy for the quality of the firm’s rank and file employees, and find that firms with a higher-quality workforce produce financial statements with higher accruals quality, fewer internal control system violations, and fewer restatements, suggesting that these employees improve their firm’s mandatory disclosures. We also find that firms with higher-quality rank and file employees issue management forecasts that are more frequent, timely, accurate, precise, and less biased, suggesting that the benefits of high-quality rank and file employees also extend to firms’ voluntary disclosures. In additional analyses, we find that when financial reporting violations do occur, the quality of the firm’s workforce is positively associated with the likelihood that an employee blows the whistle to a regulator. Overall, our findings suggest that high-quality rank and file employees are positively associated with financial reporting quality.