Auditor's financial stress: An inconspicuous determinant of audit outcomes

Abstract

The relation between personnel-related factors and office-level audit quality has not received much attention in the audit literature. To examine this further, we investigate the relationship between an auditor's financial stress and audit quality. We proxy financial stress with negative equity, when a home's market value is less than its mortgage, which is gathered from the real estate website Zillow from 2011 through 2017. More specifically, we aggregate the average values of negative equity for homes in the same city as our sample's audit offices. The results indicate that firms with auditor offices in areas with higher levels of negative equity experience higher levels of audit failure. Our results are robust when we control for median accountant salary and foreclosure rates in areas surrounding the home audit office. Overall, our findings provide important initial evidence on a potential relation between auditor-level financial stress and audit quality.