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Matthew Notowidigdo: Revisit Bankruptcy ReformWhy Auditors Hire Graduates of Local Colleges
- By
- December 21, 2020
- CBR - Accounting
Pedigree degrees are great, but so is hiring locally. The Big Four audit firms often hire graduates from feeder schools that are nearby, according to research by University of Melbourne’s Gladys Lee and Vic Naiker and Chicago Booth’s Christopher Stewart. They also find that offices close to universities produce higher-quality work.
Finding and hiring talented auditors is a priority for accounting firms in the United States, where some research has suggested that many certified public accountants have left the profession after just their first few years. And when it comes to recruiting, the Big Four accounting enterprises apparently focus on colleges close to their offices.
The researchers obtained a US campus map for PwC, which shows that the firm has recruiters stationed at 256 colleges, or 6 percent of all US universities. All these generally have recognized, well-ranked accounting programs. More than two-thirds of Big Four recruits came from the same 256 feeders, and 22 percent more came from accredited business programs, the researchers find.
Using LinkedIn, Lee, Naiker, and Stewart tracked almost 12,000 people who graduated from the feeder colleges in 2016. Almost half who were recruited by the Big Four went to offices within 60 miles.
There’s a practical reason for hiring locally: in the US, accounting requires state licensing. Big Four companies generally want graduates to sit for state exams soon after joining, and local graduates are better prepared to do so.
But the research also identifies a measurable advantage: local recruits are associated with higher-quality audits. Using 2000–16 data from Audit Analytics and Compustat databases, the researchers find that around 17 percent of their observations involved client misstatements, and having a feeder school within 60 miles reduced the likelihood of a misstatement by 9 percent.
Local hires may also be less likely to leave, which could reduce significant turnover costs. While the researchers didn’t have data to study turnover, it can be hard to acclimatize to a new city or to be far from friends and family, Stewart conjectures. And when offices are near colleges, there are more opportunities—through networking and recruiting events and the like—for a firm to meet and assess graduates.
Granted, in the COVID-19 era, many such events have been canceled, and interviews are often conducted online rather than in person—meaning local graduates may not have the same leg up. Stewart predicts that when candidate searches are done via Zoom, hiring managers may revert to pedigree to distinguish between candidates. “I wonder if turnover will be higher,” he adds, noting that because applicants come across differently in person than they do online, new hires may fail to meet managers’ expectations.
Gladys Lee, Vic Naiker, and Christopher Stewart, “Audit Office Labor Market Proximity and Audit Quality,” Working paper, September 2020.
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