Labor Market Returns to Audit Experience

Abstract

Human capital theory suggests that the potential to accumulate a portfolio of skills thatcan yield subsequent labor market returns is an important consideration in individuals’ career decisions. This paper provides the first large-sample empirical evidence on the labor market returns to audit experience by examining how auditors’ subsequent career advancement compares to that of other professionals. Using individuals’ employment profile data to track their career progress, I document that ex-auditors who transition to accounting or finance-related roles outside the public accounting sector advance more quickly than their peers who start in the same roles without an auditing background. This pattern is more pronounced for ex-auditors who move to companies with complex finances or operations, work in familiar industries or local markets, have prior BigN experience, or have three to five years of audit tenure. To explore the mechanism behind ex-auditors’ accelerated promotions, I develop a simple principal-agent model that shows employees’ contributions to the company can be inferred from the company-level performance measures that the employer uses to determine their promotions. Based on this model, I empirically document that ex-auditors contribute not only to the performance of the accounting or finance function but to the company’s overall profitability. Collectively, these findings suggest that auditing offers a competitive career path for human capital accumulation, providing important insights for individuals to make informed career decisions.