Audit personnel salaries and audit quality


This study examines the relation between audit personnel salaries and office-level audit quality. We measure audit personnel salaries at the associate, senior, and manager ranks for Big 4 audit offices from 2004 to 2013, using unique individual-auditor-level data obtained from the U.S. Department of Labor. We find that offices that pay lower salaries have a higher percentage of clients that experience restatements. In related analyses, we also find lower levels of audit quality when audit employees are paid less, relative to other lines of service in accounting firms. Finally, we document positive and significant associations between salary and fees, suggesting that audit offices pass some of the cost of higher labor onto their clients. Overall, our findings provide important initial evidence on the role of audit salary and its relation to audit quality and audit fees.

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  1. 1.

    For additional theoretical studies examining the efficiency wage theory, see Malcomson (1981), Akerlof and Yellen (1990), Yellen (1995), Fehr and Gächter (2000), and Chen and Sandino (2012). For additional empirical studies providing evidence consistent with the efficiency wage theory, see Levine (1993), Cappelli and Chauvin (1991), Fehr et al. (1993), Marti (1997), Fehr and Falk (1999), Hannan et al. (2002), Hannan (2005), Stevens and Thevaranjan (2010), and Chen and Sandino (2012).

  2. 2.

    The concern that uncompetitive salaries steer potential accountants into more lucrative careers is not new. For example, in 2000, it was noted that one reason why the quantity and quality of accounting students was reported to be falling was due to “starting salaries for accounting majors not increasing at the same rate as for other business majors” (Albrecht and Sack 2000).

  3. 3.

    The vast majority of our sample includes H-1B temporary, non-immigrant visa applications. The data also includes a small number of permanent worker visa applications. We also include in our definition of H-1B visa applications the labor condition application, which is filed by the employer as part of the visa application process. We refer to all of these applications as H-1B visa applications throughout the remainder of the study.

  4. 4.

    We find that interquartile shifts in salaries result in lower misstatement rates of 7.23, 6.84, and 14.26%, relative to the subsample means for the associate, senior, and manager analyses, respectively.

  5. 5.

    See, for example,

  6. 6.

    We find that interquartile shifts in the wage gap are associated with misstatement rates that are 5.92, 5.94, and 12.3% lower, relative to the subsample means for the associate, senior, and manager analyses, respectively.

  7. 7.

    Recent research has begun to advance our understanding of personnel effects by focusing on aspects such as education and foreign labor in the audit profession (Barrios 2017; Beck et al. 2017; Aobdia et al. 2017; Bianchi 2018).

  8. 8.

    In a 2012 speech about the state of the audit profession, PCAOB board member Jay Hanson expressed concerns that PCAOB inspections and standards may have affected the work-life of auditors, stating “one result of our activities … is that the best and brightest auditors become frustrated and leave the profession (Hanson 2012).” Later in 2013, Hanson, in a speech at the Baruch College’s 2013 Financial Reporting Conference, further stated: “One exceptionally troubling issue that I sense is getting worse is the sheer number of hours that audit teams are expected to work. … How do you function if you are working 16 h per day on a continual basis? … If audit teams are working excessive hours, there is a problem (Hanson 2013).”

  9. 9.

    Messier et al. (2008) finds evidence that partners tend to overestimate the ability of lower level personnel to detect fraud and other complex errors. While understanding partner compensation is important, it is also important to understand the relationship between audit personnel compensation and audit quality at the associate, senior, and manager level, given they play an important role in the external audit and that partners tend to over-estimate their ability.

  10. 10.

    We focus on the overall pay of an audit office for a given audit firm. However, within an office, pay disparity may affect audit outcomes. It may be the case that generous partner compensation motivates staff, for example, to work hard and achieve partner, or it may be a demotivating factor. The distribution of pay across ranks within an auditor office is beyond the scope of this paper.

  11. 11.

    Other examples include nonmonetary perks, such as flexible seating arrangements (France 2015), maternity kits (EY 2016), less formal dress codes (Tysiac 2015), and more engaging training facilities (McGinn 2015).

  12. 12.

    There are many different types of visas, depending on whether the applicant is an immigrant or a non-immigrant, the relationship of the applicant to a U.S. citizen, the country of origin of the applicant, and the type of work being performed. An H-1B visa is for an alien in a “specialty occupation,” where a specialty occupation is one that, among other things, may require “attainment of a bachelor’s or higher degree in the specific specialty (or its equivalent) as a minimum for entry into the occupation in the United States (Immigration and Nationality Act 214(h)(i)(1)(B)),” which will generally include financial statement auditors.

  13. 13.

    One might also consider controlling for or adjusting the dependent variable for the “prevailing wage” that firms are required to provide on their LCA they file in the H-1B filing process. Firms report a prevailing wage, which is the average wage for similar work in the area, in their LCA to demonstrate that they are complying with the law that requires immigrants receive wages at least equivalent to domestic workers. Given firm incentives to qualify workers as sufficiently paid, it is not clear what biases may exist in the prevailing wage value. Instead of using this potentially biased value, in some tests, we control for MSA-year fixed effects, which controls for the average wage that dominates in that geographic region in the year for Big 4 audits (as opposed to the prevailing wage, which will possibly take into account other types of auditors at other types of accounting firms).

  14. 14.

    Some H-1B applicants graduate from these three universities and will in fact be included in our sample. But, in these three universities, the majority of graduates are domestic students who will not be H-1B applicants. The three universities that gave us graduate salary data did not provide us with the visa status of their graduates.

  15. 15.

    This value is invariably affected by the fact that, as we progress to more experienced job positions, we have fewer visa applications, both because there are fewer people in these positions and because people who advance may achieve permanent status and not need to file for a visa. These data also represent our oversampling of larger cities, where the cost of living is higher (assuming the cost of living affects salaries, which we verify in Section 4).

  16. 16.

    As indicated previously, since our H-1B visa data is most available for lower level employees, there is data available for fewer states as the rank of the salary increases.

  17. 17.

    See, for example,

  18. 18.

    As an additional specification, we also include auditor fixed effects in lieu of MSA fixed effects to hold time-invariant characteristics of the Big 4 audit firms constant. We find qualitatively similar results to what is reported in Tables 5 and 6.

  19. 19.

    We also alleviate this concern by dropping the most populous city, New York, and find our results are robust. Another way to understand this concern is that how the analysis is currently conducted is equivalent to value weighting the cities by the number of visas (which, if visa applications are constant as a percentage of the population across cities, reflects the economic reality of the importance of those cities). Condensing each city down to a single observation per firm/year is equivalent to equal weighting observations, so that the Boise office of EY can influence the estimates as much as the New York City office can.

  20. 20.

    All three programs rank in the top 15 in the Public Accounting Report ranking of master of accounting programs in 2015.

  21. 21.

    Discretionary accruals is the absolute value of the firm-year residual from a regression of working capital accruals using a modified Jones model that controls for performance, growth, lagged accruals, and nonlinear effects of positive and negative cash flows from operations, estimated for each industry-year with at least 20 observations.


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We appreciate helpful comments from Russell Lundholm (editor), an anonymous reviewer, Andrew Acito, Daniel Aobdia, Mary Barth, Scott Bronson, John Donovan, Josh Gunn, Chris Hogan, Patrick Hopkins, Andrew Imdieke, Harold Kazanabon, W. Robert Knechel, Bill Kinney, Mihir Mehta, Miguel Minutti-Meza, Jessie Watkins, and workshop participants at the University of Michigan, Idaho State University, the 2016 Indiana University Accounting Leading Scholars Symposium, the 2016 Illinois Audit Symposium, the 2017 International Symposium on Audit Research (Sydney), the 2017 Midwest Accounting Research Conference (UW-Madison), the 2018 AAA Audit Midyear Meeting (Portland), and the 2018 AAA FAR Midyear Meeting (Austin). We also express gratitude to the three anonymous Universities that provided us with undergraduate placement and salary data. Finally, we thank Kevin Hoopes  for information regarding the H-1B visa data.

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Correspondence to Jeffrey L. Hoopes.



Table 10 Variable definitions

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Hoopes, J.L., Merkley, K.J., Pacelli, J. et al. Audit personnel salaries and audit quality. Rev Account Stud 23, 1096–1136 (2018).

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  • Audit personnel salary
  • Audit quality
  • Salary determinants
  • Audit fees

JEL classification

  • M41
  • M42
  • M51
  • M52