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The first quarter of the calendar year is not a great time to be an auditor at a public accounting firm. During this “busy season,” auditors often work brutally long hours to examine financial statements destined for the 10-Ks of publicly traded client companies.
In this exhausted, stressed-out state, auditors are dangerously susceptible to distraction, according to research by Young Hoon Kim, assistant professor of accounting at Costello College of Business at George Mason University.
Kim’s paper was co-authored by Matthew Ege and Dechun Wang of Texas A&M University. It is forthcoming in Contemporary Accounting Research.
Kim’s research concentrates on job postings that seem to offer an escape to greener professional pastures. The opportunity to make the leap—in reality or fantasy—to a less demanding, often better-paying role as an in-house accountant steals auditors’ attention away from their duties. Their work can suffer as a result, in quantifiable and costly ways.
“The postings we are focused on explicitly call for applicants to have public accounting experience,” Kim clarifies. “That means there is a really targeted demand for these talents.”
Kim and his co-authors looked at the number of such job postings within metropolitan areas in the U.S. where audit firm offices are located during Q1 of every year from 2010 to 2019. They found a high degree of fluctuation—for example, postings in the New York metropolitan area decreased by 30.4 percent between 2017 and 2018, and increased the following year by 48.6 percent. As the number of postings rose and fell, so did the number of restatements—that is, financial statements that contained errors and had to be redone—coming from the metro area where audit offices are located.
A one-standard-deviation increase in job postings for public accountants would make it 3.6-4.3 percent more likely that a given financial statement would need to be restated, the researchers found.
“When auditors are under a heavier workload and it seems like there are more and better opportunities outside, they can start actively pursuing opportunities by talking to recruiters or filling out applications and ultimately leave their firms, which can negatively affect audit outcomes.” Kim says. “In addition, even when they do not leave or actively seek out these opportunities, they may get distracted and demotivated, which further impacts audit quality.”
He emphasizes that botched audits can have profound effects on capital markets. “Shareholders are obviously the ones who suffer most. But it can also lead to a lot of different punishments, like the replacement of an auditor or CFO. That is why we use restatements as an egregious failure proxy.”
The association between job postings and misstatements was even stronger when the advertised position was with a non-publicly traded employer. Because these employers are subject to far more lenient financial reporting requirements, their accountants enjoy even cushier lifestyles. And since auditors know this, job postings from these employers present an especially strong distraction.
The association was also pronounced for audit offices experiencing particularly heavy workloads during the busy season. The researchers estimated workload by calculating the ratio of per-office audit fee revenues to auditors employed at that office. They also used the number of open (i.e. advertised) auditor positions to identify shorthanded offices.
However, auditors who received a larger-than-average raise at the end of the previous year were better at resisting the distraction of job postings, as the researchers concluded with the help of individual-level salary models from Revelio Labs.
But using financial rewards to keep auditors focused would run counter to industry culture, Kim says. “One way the Big Four motivate their personnel is by saying ‘if you work here for two or three years, you can get a big salary increase when you leave.' Or if you make partner, which only selected ones can do, then obviously you’re going to have equity. That’s a motivating factor.”
The current shortage of accounting talent, which may only deepen with time due to retirement and the impending enrollment cliff, highlights the problems with this motivational strategy. The scarcity of experienced accounting personnel creates a pressing need to fill positions—hence, the distraction of job postings won’t abide anytime soon. In fact, their attention-grabbing appeal will arguably intensify as the war for talent pushes would-be employers to offer more competitive salaries.
“Public accounting firms should seriously consider how to maintain their talents and motivate them not to be distracted by outside opportunities. Otherwise, they will not choose or continue a career in public accounting. Plus, the public could suffer from lower-quality financial statements,” Kim says.