Does audit quality affect auditors’ career development? Evidence from Chinese audit firms’ demise

Abstract

Purpose This study aims to test the effect of individual audit quality on career advancement the audit labour market. Design/methodology/approach This paper uses data on auditors from two collapsed audit firms in China, namely, Ruihua and Zhengzhong Zhujiang, and tests the effect of individual audit quality on career advancement in the audit labour market. Findings The baseline results show that high-quality audits promote auditors’ career advancement. Our results hold after a battery of robustness tests. Further analyses support our hypothesis, indicating that client retention and audit fees are positively related to auditors’ prior audit quality. The effect of audit quality on career advancement does not hold for auditors from sanctioned branch offices or for auditors with prior culpable clients, as shared reputation damage can weaken the effect of high audit quality. Furthermore, this paper investigates whether the reputation enhancement effect of high audit quality can be strengthened by auditor experience, the title of “senior auditor” and IPO auditing experience. We also show that clients and audit firms place more weight on the quality of audits conducted by auditors in competitive markets and auditors with engagements matched with industries. Originality/value Together, these findings indicate the vital role of individual audit quality in auditors’ career development in the audit labour market, consistent with the reputation rationale for audit quality.