Older auditors are being forced out at firms despite pulling in bigger fees

Mandatory retirement policies at U.S. auditing firms are pushing out experienced partners who are bringing in substantial revenue and audit quality as good as that of younger partners.

A new research study, based on age data for 3,148 U.S. public company audit partners, examines the impact of mandatory retirement ages on audit firms. The study found no sign of a decline in audit partner performance when compared to younger audit partners. The older audit partners tend to charge higher fees than younger partners, but the mandatory retirement policies at their firms are forcing out experienced revenue earners, even though they’re providing audit quality that’s at least equivalent to their younger counterparts. The study, from professors Jenna Burke of University of Colorado Denver, Rani Hoitash of Bentley University, and Udi Hoitash and Summer Xiao of Northeastern University, will be appearing in the Journal of Accounting and Public Policy.

The research comes at a time when accounting and auditing firms are coming under pressure to diversify their ranks and promote younger accountants to the partner level in order to retain employees during a talent shortage that’s continuing despite the pandemic. Firms have traditionally promoted white males into partners for generations, but they have been making efforts in recent years to promote more women and people from diverse racial and ethnic backgrounds. However, their older partners are still pulling in revenue and often generating higher fees.

“Theory on retirement and career horizons suggest conflicting forces on audit outcomes as partners age,” said the researchers. “First, partners could shirk/disengage as they approach retirement and become less concerned with advancing their career, which could harm audit quality. In contrast, these partners possess connections, experience and expertise that can benefit performance. Results of the study show no decline in audit partner performance, when compared to younger audit partners. Yet, these audit partners charge higher fees after controlling for other client and auditor characteristics that are known to influence fees. Combined, this demonstrates that U.S. audit firm mandatory retirement policies force out experienced revenue earners that are providing audit quality equivalent to their younger counterparts.”

The mandatory retirement age within the Big Four firms ranges from 55 to 62, even though most people don’t plan to retire until after they turn 65. The mandatory retirement age policies have provoked controversy and lawsuits, as they are younger than the anticipated retirement age for executives in related roles, board members, audit partners in other countries, and even airline pilots who are responsible for the lives of hundreds of passengers every time they fly a plane. Several U.S. audit firms have faced anti-discrimination investigations for their retirement policies, and the Equal Employment Opportunity Commission has even argued that the policies at several Big Four firms violate the Age Discrimination in Employment Act. So far, those investigations have not led to any action against the firms, who have pointed out that audit partners voluntarily sign the partnership agreement that mandates retirement age. Firms also argue that partners act as business owners and thus are exempt from federal antidiscrimination law, which protects employees rather than business owners.

To explore the consequences of the mandatory retirement policies, the researchers identified audit partners using the Public Company Accounting Oversight Board’s Auditor Search database, which became available in 2016. Before 2016, audit partner identity was largely unknown and such an analysis was impossible without the recent Form AP that firms now need to submit to the PCAOB. The study found the average age of public company audit partners is 46.11 years old, with the majority of partners falling in the range of 41 to 51 years old. Retiring partners are 56.40 years old on average.

Firms have also cited other justifications for mandatory retirement policies, contending that forcing partners to retire allows for age and gender diversity by enabling younger and female partners to be promoted and grow their client portfolios. Indeed, the researchers uncovered evidence that partner retirements help promote and grow the client portfolios of younger and female audit partners. New partners who have either been assigned to their first public client or newly promoted in 2017 and 2018 are younger and more gender diverse, highlighting a significant benefit of mandatory retirement policies.