Is There a Brain Drain in Public Accounting in China?

Auditing is a profession that is synonymous with stress and burnout. The hours are typically long and the work can be repetitive. Because their job involves poking around in companies where they don’t normally work, they don’t always get the most enthusiastic of welcomes when parachuting into their clients’ offices to conduct work.

The public accounting sector is notorious worldwide for its high turnover. In China, the turnover rate for certified public accountants (CPA) was almost 30 percent in Shenzhen alone. Regulators from the U.K. and Australia to China have expressed growing concern that more and more CPAs are leaving public accounting firms in favour of internal corporate roles, and the adverse impact this will have on audit quality in a world where investors are on high alert for financial fraud.

This was the basis for a new study which looked at the “brain drain” situation in the auditing industry, specifically in China. It found that (rather counter-intuitively) the departure of auditors from public accounting may actually be improving the overall competency of audits.

“The weak die out and the strong survive. This is basically what’s happening in the public accounting sector in China.”

Prof. Zhuang Zili

The research Is There a Brain Drain in Auditing? The Determinants and Consequences of Auditors Leaving Public Accounting was jointly written by Zhuang Zili, Associate Professor of Accounting at The Chinese University of Hong Kong (CUHK) Business School, Prof. Robert Knechel at the University of Florida, Prof. Mao Juan at the University of Texas at San Antonio and Prof. Qi Baolei at Xi’an Jiaotong University and Xinjiang University. They focused on the trend of auditors exiting the public accounting industry altogether, rather than simply taking another job at a rival accounting firm.

In public accounting, accountants are employed by a third party (typically an accounting firm) to provide independent assessment and advice. Auditing, where the accounting firm examines a client’s financial statement disclosures, is one of the major disciplines in public accounting, with the others being tax, consulting, advisory and assurance. The work of public accountants is in contrast with corporate roles, where they are employed in an internal capacity to prepare and analyse a company’s financial statements. To practice public accounting, accountants need to be licensed as a CPA.

Using data from China, the study finds that an auditor is more likely to leave the public accounting profession if they lose clients, deliver lower audit quality or work for firms outside the “Big Four” (which consists of the four largest accounting firms Deloitte, EY, KPMG and PwC).

On the other hand, auditors who perform well in their jobs – and have been promoted as managers or partners at their respective auditing firms as a result of their success – who generate more revenue, have more clients and provide higher audit quality, are less likely to leave the profession. Moreover, auditors who work for Big Four firms were 69.1 percent less likely to leave the profession compared to non-Big Four auditors.

Causes of Departure

Prof. Zhuang and his collaborators studied the profiles of signing auditors in China to better understand the reasons that caused auditors to leave the profession. A signing auditor is usually a senior accountant (who would typically lead an “engagement” with a client) within a public accounting firm whose name appears on their client’s audit report, and they would typically be held accountable for the quality of the audit. The researchers looked at information from the China Securities Market and Accounting Research database from 2001 to 2015 and manually collected the personal information of signing auditors from the website of the Chinese Institute of Certified Public Accountants (CICPA).

Contrary to the view that a high workload leads to burnout, the study finds that having a large number of clients actually lowers the likelihood of an auditor leaving the profession. The researchers say this is maybe because having more clients and collecting more fees are symbols of success and competence, and encourage auditors to stay.

In addition, the study finds that the issuance of modified audit opinions, where an auditor discloses errors or discrepancies in their clients’ financial documents, tends to increase the chances of auditors leaving the profession. Prof. Zhuang explains that as the audit market in China is a buyers’ market, auditors who issue these disclosures stand to alienate their clients, the loss of which would lead them to eventually leaving the industry. However, the study results show that auditors who work for the Big Four to be less affected.

Another risk factor driving auditors to quit is the presence of difficult clients. According to the results, auditors who must deal with difficult clients, defined as firms which have strong incentives to manipulate earnings, are 8.9 percent more likely to change profession.

Moreover, the study found that auditors who work in firms that were part of a merger were more likely to leave the public accounting industry. Prof. Zhuang explains that due to waves of consolidation in China’s public accounting industry in the early 2000s, the number of audit firms in the country fell from 72 to 44. These mergers created job losses and some auditors simply decided to leave the profession altogether.

“The weak die out and the strong survive. This is basically what’s happening in the public accounting sector in China,” Prof. Zhuang says. “If auditors are quitting the profession on performance, then it’s no real ‘brain drain’,” he adds. “What would be more be worrying is if high performing auditors leave the profession to seek career advancement elsewhere.”

Why Do Good Auditors Quit?

According to the study, top university graduates, people with graduate degrees and female auditors were more likely to leave a career in auditing. Particularly, female auditors were 10.7 percent more likely to quit auditing than their male counterparts.

The researchers tracked the career path for over 1,000 auditors who left the industry and found most of them landed prominent jobs in the corporate sector. For instance, 39 percent of the sampled auditors became top executives, 14 percent became chief accountants, 13 percent became entrepreneurs, 12 percent became audit committee members of a company’s board of directors, eight percent became chief financial officers, and seven percent took on portfolio manager and financial analyst roles.

“Auditing involves long working hours and extensive travel especially during the busy season. Female auditors are more likely to find that the pressure makes it difficult to balance their work and their family lives. For highly educated auditors, they can easily find opportunities in other fields,” Prof. Zhuang says. The study notes that auditors who have more education tend to join the corporate sector in senior management roles upon exiting public accounting. On the other hand, women are less likely to take up a corporate role, something the researchers believe could at least be partially due to the “glass ceiling” effect preventing women from being promoted to top management jobs.

Impact on Audit Firms

The study finds that companies tend to switch to another audit firm when their respective signing auditor exits the industry. On the other hand, companies which stick to the same audit firm after the departure of their signing auditor are typically able to negotiate a lower fee, a situation which is exacerbated for firms that are outside the Big Four. Despite the change in personnel, the quality of the audit provided by the firms tends to stay the same.

The study also finds that these results were even more pronounced for the subset of auditors who quit the profession for high profile roles in publicly listed companies (as opposed to other career avenues), with clients even more likely to change audit firms or haggle for an even deeper discount for their audit fee. As auditors who move into high profile roles in publicly listed companies usually represent the cream of the accounting crop, the companies they used to audit would experience a drop in audit quality as their replacement is typically less skilled.

Prof. Zhuang and his collaborators point out that the study results have significant implications for audit firms in terms of recruitment, training and workload policies. Understanding the causes and consequences of why auditors leave the profession could help the industry to retain the talented while weeding out the less capable.

“The results may also be important to regulators because the so called ‘brain drain’ in auditing may not be as severe a problem as previously considered. Just like water flowing around a rock, audit firms barely miss a step and are generally able to cope with changes while keeping the quality of audits consistent,” says Prof. Zhuang. “Granted, when top auditors leave, it can deal a tremendous blow to their firm and the industry overall. However, this can be mitigated through improved firm quality control, better training and staffing.”