When auditors walk, clients pay

By Alexandra Richter

BUFFALO, N.Y. — As turnover of auditors increases, an accounting firm’s ability to deliver timely, accurate and effective audits declines — and so does overall client service — according to new research from the University at Buffalo School of Management.

Forthcoming in The Accounting Review, the study finds that constant staffing changes threaten audit quality, inflate client costs and destabilize the auditor-client relationship.

“Employee turnover is notoriously high within public accounting firms, where it can easily exceed 20% per year,” says the study’s co-author, Joshua Khavis, PhD, assistant professor of accounting and law in the UB School of Management. “When firms lose employees, particularly experienced personnel, it’s more than a human resources issue. Turnover can disrupt operations and result in loss of accumulated knowledge and talent, which may damage performance outcomes and weaken firm reputations.”

Using data from the online job profiles of audit employees at 20 major U.S. accounting firms from 2010 to 2017, the researchers discovered that talent outflow leads to diminished audit quality and more frequent breaks in the auditor-client relationship — showing that high turnover hinders an accounting firm’s ability to deliver for its clients and leads to clients finding new accounting firms that deliver better customer service in the form of decreased auditor turnover. The study is the first large-sample empirical evidence that directly links audit employee turnover to poorer audit delivery and strained client relationships.

“Regulators and industry leaders, including the Public Company Accounting Oversight Board and the Center for Audit Quality, have long voiced concerns about the negative consequences of high turnover,” says study co-author Brandon Szerwo, PhD, assistant professor of accounting and law in the UB School of Management. “Our findings validate those concerns and highlight the real operational and reputational costs.”

The evidence suggests that if accounting firms report their audit employee turnover, it could give investors, regulators and other external stakeholders a new view into audit production and increased ability to assess audit risk and performance quality.