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Friday
17
May
2013

Chairs Research Seminar Series: Jere Francis : University of Missouri : May 17, 2013

1:30 PM to 3:00 PM

Title: City-Level Human Capital and Audit Markets

Abstract:  This study investigates how human capital in United States cities affects the local audit market in each city. Human capital is measured in the urban economics literature as the average educational level in a city, and we argue that this will affect the quality of labor in the local audit market. We predict and find evidence that audit quality is positively associated with the level of human capital in an audit office's local labor market, and that this association is stronger for smaller (non-Big 4) audit firms than for the larger Big 4 audit firms, which are less sensitive to local labor markets. All else equal, public companies are more likely to choose a non-Big 4 auditor when the level of human capital in the audit office's local labor market is high. Further, audit quality, as measured by clients' abnormal accruals, total working capital accruals, and accrual estimation errors, improves as human capital increases and this relationship is stronger for non-Big 4 auditors. Finally, we show the audit fees earned by non-Big 4 audit firms, but not Big 4 audit firms, increase in the level of local human capital. Together, these results suggest that small auditors' greater sensitivity to local labor markets affects their ability to compete in the public company audit market.

Jere Francis is Curators' Professor and Trulaske Chair of Accounting at the University of Missouri-Columbia.  He is an Associate Editor at Contemporary Accounting Research and serves on editorial boards of The Accounting Review, Review of Accounting Studies, and Auditing: A Journal of Practice & Theory.  His research examines the impact of auditing on the quality of corporate financial reports, and the role of institutions in explaining cross-country differences in the quality of accounting and auditing practices.

Location

Lucas Hall
Room 125

Contact
Business School Dean's Office
Melissa Sims
Tel 408-554-4578
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