Are the most capable auditors in the Big 4 firms?

  1. "Millán Tapia, Ana 1
  2. Ortín Ángel, Pedro
  3. Sundgren null, Stefan 2
  1. 1 Universitat Autònoma de Barcelona

    Universitat Autònoma de Barcelona

    Barcelona, España


  2. 2 Umeå School of Business and Economics
Documents de Treball ( Universitat Autònoma de Barcelona. Departament d'Economia de l'Empresa )

ISSN: 1988-7736

Year of publication: 2016

Issue: 1

Type: Article

More publications in: Documents de Treball ( Universitat Autònoma de Barcelona. Departament d'Economia de l'Empresa )


The CPA exam provides an evaluation of the auditors' professional competences at the early stages of their careers. Using information from the results generated in Sweden, the paper shows that i) auditors at Big 4 firms are younger when they take the exam, ii) younger auditors and auditors at Big 4 firms perform better in the exam iii) there is a positive association between the results in the CPA exam and wage increases after having received the CPA certification and the association is stronger at Big 4 firms. This evidence is consistent with a theoretical model where Big 4 audit firms attract and retain the more capable auditors of each cohort, based on the imperfect information about the capabilities of the auditors that they have.

Bibliographic References

  • Allen, A. and Woodland, A.M, 2006. The 150‐Hour Requirement and the Number of CPA Exam Candidates, Pass Rates, and the Number Passing, Issues in accounting education 21 (3), 173- 193.
  • Altonji, J.G. and Pierret, C.R., 2001, Employer learning and statistical discrimination, The Quarterly Journal of Economics, 116, 313- 350.
  • Bagues, M.F. and Esteve-Volart, B., 2010. Can Gender Parity Break the Glass Ceiling? Evidence from a Repeated Randomized Experiment, The Review of Economic Studies 77, 1301-1328.
  • Bagues, M.F. and Perez-Villadoniga, M., 2012. Do Recruiters Prefer Applicants with Similar Skills? Evidence from a Randomized Natural Experiment, Journal of Economic Behavior & Organizations 82 (1), 12-20.
  • Baker, G., Gibbs, M. and Holmström, B., 1994. The internal economics of the firm: Evidence from Personnel Data, The Quarterly Journal of Economics 109, 881-919.
  • Bandiera, O., Guiso,L., Prat, A. and Sadun,R., 2015. Matching Firms, Managers, and Incentives. Journal of Labor Economics, 33 (3), 623-681.
  • Bauer, T.K. and Haisken-DeNew, J.P, 2001”Employer Learning and the Returns to Schoolong” Labour Economics, 8,161-180.
  • Blaug M., 1976. The Empirical Status of Human Capital Theory: A Slightly Jaundiced Survey, Journal of Economic Literature 14 (3), 827-55.
  • Boone, J., Legoria, J., Seifert, D.L. and Stammerjohan, W.W., 2006. The associations among accounting program attributes, 150-hour status, and CPA exam pass rates, Journal of accounting education 24 (4), 202- 215
  • Brahmasrene, T. and Whitten, D., 2001. Assessing Success on the Uniform CPA Exam: A Logit Approach, Journal of Education for Business 77 (1), 45- 50.
  • Caliendo, L., Monte, F. and Rossi-Hansberg, E., 2015. The Anatomy of French Production Hierarchies, Journal of Political Economy 123 (4), 809-852.
  • De Groot, M. H., 1970. Optimal statistical decisions, New York: McGraw-Hill.
  • Farber, H.S. and Gibbons, R., 1996. Learning and Wage Dynamics, The Quarterly Journal of Economics 111, 1007-1047.
  • Francis, J.R., 2004. What do we know about audit quality? British Accounting Review, 36, 345-368.
  • Francis, J.R., 2011. A framework for understanding and researching audit quality. Auditing: a Journal of Practice and Theory, 30, 125-152.
  • Gabaix, X., and Landier. A., 2008. Why has CEO pay increased so much? Quarterly Journal of Economics 123 (1), 49–100.
  • Garicano, L., 2000. Hierarchies and the Organization of Knowledge in Production, Journal of Political Economy 108 (5), 874-904.
  • Gersbacha, H., and Schmutzle, A., 2014. Does globalization create superstars? A simple theory of managerial wages, European Economic Review71, 34-51.
  • Gordon, R.D., 1941. Values of Mills’ ratio of area to bounding ordinate and of the normal probability integral for large values of the argument, The Annals of Mathematical Statistics, 12, 364–366.
  • Grant, C.T., Ciccotello, C.S. and Dickie, M., 2002. Barriers to professional entry: how effective is the 150-hour rule? Journal of accounting and public policy 21 (1), 71- 93.
  • Harris, M. and Holmstrom, B., 1982. A theory of wage dynamics, Review of Economic Studies 49, 315- 333.
  • Knechel, R.W., Krishnan, G.V., Pevzner, M., Shefchik, L.B. and Velury, U.K., 2013. Audit quality: insights from the academic literature, Auditing: a Journal of Practice and Theory 32 (1) 385-421.
  • Knechel, R.W., Niemi, L. and Zerni, M., 2013. Empirical evidence on the implícit determinants of compensation in Big 4 audit partnerships. Journal of Accounting Research 51 (2), 349- 387.
  • Lange, F., 2007. The speed of Employer Learning. Journal of Labor Economics, 25,1, p.1-35.
  • Lazear, E.P. and Oyer, P., 2012. Personnel economics. In: Gibbons, R., Roberts, J. (Eds.), Handbook of organizational economics. Princeton University Press, Princeton, NJ, pp. 479-519.
  • Liu X. and Simunic, D.A., 2005. Profit Sharing in an Audit Oligopoly. The Accounting Review, 80 (2), 677-702.Mincer, J., 1974. Schooling, Experience and Earnings, New York, National Bureau of Economic Research.
  • Morgan, J.D.,2015. The relationship of CPA exam delay after graduation to institutional CPA exam pass rates. Journal of Finance and Accountancy. 18, 1-11.
  • Murphy, K.J., 1986. Incentives, learning, and compensation: a theoretical and empirical investigation of managerial labor contracts, Rand Journal of Economics 17, 59-76.
  • Ortín-Angel, P. and Salas-Fumás, V., 2002. Compensation and span of control in hierarchical organizations, Journal of Labor Economics 20, 848- 876.
  • Ortín-Angel, P. and Salas-Fumás, V., 2006. Compensation dispersion between and within hierarchical levels, Journal of Economics & Management Strategy 16 (2), 848- 876.
  • Pan, Y., Wang, T., Y., and Weisbach, M., S., 2015. Learning About CEO Ability and Stock Return Volatility, The Review of. Financial. Studies, doi: 10.1093/rfs/hhv014.
  • Poppo, L. and K. Weigelt, 2000, A test of the Resource-Based Model Using Baseball Free agents, Journal of Economics and Management Strategy, 9, 585-614.
  • Reilly, F. K. and Stettler, H. F. 1972. Factors Influencing Success on the CPA Examination Journal of Accounting Research 10.2 (Fall 1972): 308.
  • Rogers, W., 1994. Sg 17: Regression Standard Errors in Clustered Samples. Stata Technical Bulletin 3(13), 19-23.
  • Rosen, S., 1982. Authority, Control, and the Distribution of Earnings, Bell Journal of Economics 13 (2), 311-323.
  • Sattinger, M., 1975. Comparative Advantage and the Distributions of Earnings abilities, Econometrica 43 (3), 455-468.
  • Sattinger, M., 1993. Assignment models of the distribution of earnings. Journal of Economic Literature, 31 (2), 831-880.
  • Sundgren, S. and Svanström, T., 2013. Audit office size, audit quality and audit pricing: evidence from small and medium-sized enterprises. Accounting and Business Research 43, 31-55
  • Taylor, L. A., 2013. “CEO wage dynamics: Estimates from a learning model,” Journal of Financial Economics, Volume 108 (1), 79–98.
  • Terviö , M. 2008. The difference that CEOs make: An assignment model approach. American Economic Review 98 ( 3), 642–68
  • Trompeter, G., 1994. The effect of partner compensation schemes and generally accepted accounting principles on audit partner judgment. Auditing: A Journal of Practice & Theory 13 (2): 56–68.
  • Waldman, M., 2012. Theory and Evidence in Internal Labor Markets, in Gibbons, R., Roberts, J. (Eds.), The Handbook of Organizational Economics, Princeton University Press: Princeton, NJ, pp. 520- 574.
  • Woodcock, S.D., 2008. Wage differentials in the presence of unobserved worker, firm, and match heterogeneity, Labour Economics 15 (4), 771- 793.