Strength of Audit Firms’ Human Resource Systems and Client-Level Audit Outcomes: Evidence from a Multiple Source Study

We examine whether differences in HR systems among audit firms can affect client-level audit outcomes. Based on the audit quality framework of Knechel, Krishnan, Pevzner, Shefchik, and Velury (2013b) and the strategic HRM literature, we posit that audit firms with stronger HR systems are likely to deliver more desired audit outcomes, ceteris paribus. Building on systems theory, we outline and capture a wholistic picture of the audit firm HR system as consisting of three dimensions: competency-, motivation-, and opportunity-enhancing practices. We draw on two distinct data sources for our analyses: a survey allowing us to tap into the HR systems of large audit firms servicing PIE clients in The Netherlands and corresponding client-level archival data to measure audit outcomes. Our results suggest that HR systems are an internal context factor affecting client-level audit outcomes. Supplemental analyses indicate that competency- and opportunity-enhancing HR practices are associated with more desirable audit outcomes. Data Availability: Part of the data are available from the sources cited in text. JEL Classifications: M42; O15.