Employee Movements from Audit Firms to Audit Clients*
ANDREW R. FINLEY, Claremont McKenna College
MINDY H. J. KIM, George Mason University
PHILLIP T. LAMOREAUX, Arizona State University
CLIVE S. LENNOX, University of Southern California†
ABSTRACT
Regulators have expressed concerns about the “revolving door” between auditors and clients,
whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni
hires”). Regulators are concerned that these direct hires could compromise audit quality, partly
because these employees could have previously audited their hiring company’s financial statements.
In contrast, we examine accounting and finance executives who move indirectly from audit
firms to audit clients and who could not have previously audited the hiring company’s financial
statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the
direct hires that have concerned regulators. We predict and find that both direct and indirect alumni
hires are associated with lower rates of executive turnover and audit firm turnover. However, there
is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment
or that these hires are associated with lower audit quality. Overall, our findings suggest that
direct and indirect employee movements from audit firms to audit clients are beneficial to executives,
audit clients, and audit firms because they reduce the incidence of costly turnover.