Opening the Black Box of Audit Quality : The Effect of Individual Auditor Quality on Audit Outcomes

This study examines the effect of individual auditor quality (below the partner level) on overall audit quality. We aggregate audit employee-level performance evaluations to create a measure of auditor quality at the office level. We find that high quality audit offices are associated with a lower likelihood of client restatement, fewer client abnormal accruals, and a higher likelihood of a client receiving a going concern opinion. We partition employees into low, medium, and high level, based on job title, in order to investigate which employee levels drive these results. We find that the restatement results are driven by high quality high-level employees (Senior Managers/Directors), while the going concern results are driven by high quality low-level employees (Seniors). Furthermore, we find evidence that high quality audit teams are associated with all aspects of audit quality and the magnitude of these team effects are much larger than those of the effects for any individual employee type. These findings are consistent with higher-level auditors preventing the most serious financial statement deficiencies, low-level employees contributing to audit firm independence, and overall team quality creating synergy which has the strongest effect on all aspects of audit quality. Overall, our empirical results suggest that individual auditor quality is associated with higher quality audits, and that employees at all levels affect audit outcomes