Abstract

This paper examines the influence of labor market power in the audit industry. Recent studies in labor economics find that companies with greater labor market power can recruit and retain more talented employees. Using a novel and comprehensive dataset of online job postings, we construct a measure of local audit offices’ labor market power. We first show that audit offices with higher labor market power demand more skills from job candidates, consistent with an increased ability to recruit and retain better auditors. We also find evidence that these audit offices pay lower wages, consistent with them exploiting labor market power to reduce their costs. We then document that client companies audited by offices with greater labor market power have lower absolute values of discretionary accruals and are less likely to restate their earnings and to meet or narrowly beat earnings targets, suggesting that greater auditor labor market power improves audit quality. Audit offices with greater labor market power also appear to exploit their cost and quality advantages to lower fees and increase market share. Collectively, our findings highlight the importance of labor market power in understanding auditor competency.