Rapid turnover among accounting employees could be a sign of future financial reporting problems, according to a new study.
The study, from researchers at the University at Buffalo School of Management, found that the churn of accounting employees was a predictor of subsequent financial reporting problems. The connection was strongest at companies with more complex accounting operations and in labor markets where qualified accountants are more difficult to recruit and retain. In addition, higher employee turnover in an accounting department was associated with larger audit fees and less accurate management forecasts.
The research, which will be appearing in the Journal of Accounting and Public Policy, finds evidence that the loss of reporting talent from existing employees leaving the firm and the dilution of talent through inexperienced employees joining the firm contribute to lower financial reporting quality.
"With fewer accountants entering the profession, losing qualified staff can put added pressure on employees and processes responsible for financial reporting," said study co-author Joshua Khavis, an assistant professor of accounting and law in the UB School of Management, in a statement Friday.
To examine the connection between accounting employee turnover and financial reporting quality, he and his fellow researchers analyzed accounting department data for more than 1,600 firms between 2008 and 2021. The data needed to analyze the employee movement came from Revelio Labs, which converts data from more than 500 million LinkedIn résumés into structured proprietary datasets.
The researchers tracked three types of workforce turnover: accounting employees being replaced (i.e., employee churning), net departures and net hiring. They then compared the employee turnover patterns with signs of financial reporting problems, including misstated financials, late filings and delayed earnings announcements.
The study carries regulatory implications as the Securities and Exchange Commission considers new requirements for companies to disclose information about their workforce, going from quarterly reporting to an option for semi-annual reporting twice a year. The research also gives investors and regulators a way to spot potential reporting issues before they become widely known: publicly available employment data.
"Tracking employee movements through such platforms as LinkedIn could help investors identify potential risks, especially as this information becomes more accessible through advances in data-capturing technology and new data providers," said study co-author Michael Dambra, who is Kenneth W. Colwell Chair of Accounting and Law and associate professor of accounting and law at the UB School of Management, in a statement.
Khavis and Dambra collaborated on the study with UB School of Management alumna Zhiru Lin, who is now an assistant professor of economics and management at DePauw University.
