FAR Working Paper 2022/02-07: Network Structure and Auditor Compensation: Evidence from a Bipartite Network
This paper examines the relationship between the extent of knowledge flow during audit practice (measured by the local network clustering coefficient) and auditor compensation. We exploit a unique bipartite (i.e. two-mode) network composed of individual auditors assigned to different audit engagements from an audit firm for one full year to determine our local network clustering coefficient and auditor compensation data from this audit firm’s personnel records. Informed by social networks theory and determinants of wage in labor economics, we find a positive association between local network clustering and auditor compensation, which is both statistically and economically significant. Our results are robust to alternative measures of local network clustering coefficient, alternative explanations of structural holes and centrality, alternative linear specification and endogeneity concern. Furthermore, we find that this positive association may be primarily driven by seniors working on audit engagements. Overall, our results suggest that embeddedness within knowledge networks plays an important role for auditor compensation.
Authors
Reggy Hooghiemstra is a professor at the University of Groningen. He has published on a wide variety of topics including board processes, corporate governance, the role of culture in auditing and accounting, and impression management. His papers have appeared in both management (e.g., Journal of Management, Journal of Business Ethics) and accounting journals (e.g., Auditing: Journal of Practice and Theory, European Accounting Review).
Dennis Veltrop is an assistant professor at the University of Groningen and holds a position as an economist at the research department at De Nederlandsche Bank. He is also co-founder of BoardResearch.org. His research focuses on corporate governance and board behavior in particular. His papers have appeared in corporate governance and management journals (e.g., Journal of Management, Journal of Management Studies, CorporateGovernance).
