By Alexandra Richter

BUFFALO, N.Y. — Investors looking for early signs of declining financial reporting quality may want to pay attention to the employee turnover in a company’s accounting department, according to new research from the University at Buffalo School of Management.

Forthcoming in the Journal of Accounting and Public Policy, the study finds evidence that the loss of reporting talent from existing employees leaving the firm and the dilution of talent through inexperienced employees joining the firm contribute to lower financial reporting quality.

“With fewer accountants entering the profession, losing qualified staff can put added pressure on employees and processes responsible for financial reporting,” says study co-author Joshua Khavis, PhD, assistant professor of accounting and law in the UB School of Management.

To examine the link between accounting employee turnover and financial reporting quality, the researchers analyzed accounting department data for more than 1,600 firms between 2008 and 2021. The data necessary to construct the employee movement was obtained from Revelio Labs, which converts data from more than 500 million LinkedIn résumés into structured proprietary datasets. They tracked three types of workforce turnover: accounting employees being replaced (i.e., employee churning), net departures, and net hiring. Then, they compared the employee turnover patterns with signs of financial reporting problems, including misstated financials, late filings and delayed earnings announcements.

The researchers found that accounting-employee churning predicted subsequent financial reporting problems. The connection was strongest at companies with more complex accounting operations and in labor markets where qualified accountants are harder to recruit and retain. Additionally, higher employee churning in an accounting department was associated with greater audit fees and less accurate management forecasts.

The study carries regulatory implications as the United States Securities and Exchange Commission considers new requirements for companies to disclose information about their workforce. The research also offers investors and regulators a way to spot potential reporting issues before they become widely known: publicly available employment data.

“Tracking employee movements through such platforms as LinkedIn could help investors identify potential risks, especially as this information becomes more accessible through advances in data-capturing technology and new data providers,” says study co-author Michael Dambra, Kenneth W. Colwell Chair of Accounting and Law and associate professor of accounting and law.

Khavis and Dambra collaborated on the study with UB School of Management alumna Zhiru Lin, PhD ’24, assistant professor of economics and management at DePauw University.