Using a little noticed filing by audit firms, recent academic research has established a statistical link between heavy workloads for auditors and reduced audit quality.

The emerging study from professors at the University of Alabama and Louisiana State University finds where audit engagement workload is high, companies have significantly higher abnormal discretionary accruals, are more likely to restate earnings, and are less likely to get a going concern opinion even when signs of distress are present.

“This is the first document we know of that speaks to where audit firms put their people,” says co-author Steve Buccheit. “A huge amount of audit firm employee time is going to nonpublic clients.”

That has a bearing on audit quality, says co-author William Buslepp. “Firms that have a lot of resources relative to the audit, or are putting more people on audits, generally have better audit quality,” he says. “If you have very few auditors assigned to an audit, you generally do lower quality than firms that have more auditors assigned to an audit.”

The study is based on data found in Form 2 filings with the Public Company Accounting Oversight Board. Audit firms that are registered with the PCAOB are required to file Form 2 to provide information on their available human resources and how they are deployed on public audit engagements compared with other services.

As indicators of the work audit firms are doing, Form 2 filings get far less attention than the PCOAB’s inspection reports, which provide details around what inspectors find when they pore over audit files. When Buchheit and Buslepp began their research, it was focused on staffing data provided in inspection reports, they say. But they found through the course of their work that Form 2 filings provided more useful data in understanding how audit firms assign their staff to public company audit engagements vs. other audit work or non-audit work. 

The data also provides better insight into where audit firms are deploying their audit staffing resources than fee-based proxies that have been used in prior studies. Using Form 2 data in filings from 2009 to 2015, the study finds that firm-level audit workload ratios provide “a relatively consistent audit quality signal” and that the data “captures audit inputs incrementally better than common fee-based proxies.”

The authors controlled for audit fees and abnormal audit fees, which are the typical proxies in U.S. research on audit inputs or audit effort, along with identifiable firm characteristics known to affect audit quality proxies. “We find that companies audited by firms with relatively high workload ratios are more likely to restate earnings, have significantly higher abnormal discretionary accruals, and are less likely to receive a going concern opinion when signs of distress exist compared to companies audited by firms with relatively low workload ratios,” the professors report. “These results are consistent with the intuitive notion that relatively understaffed audits result in reduced audit quality.” 

PCAOB Chairman Jim Doty speaks openly and regularly about regulatory concerns over the audit profession’s business model and what effect it has on audit quality, especially with respect to the presence of consulting services under the same business umbrella as audit services. The PCAOB and the Center for Audit Quality are exploring how to define audit quality so it can be better measured and improved. Both proposals contemplate staffing as a factor in audit quality.