Alumni Affiliation: a benefit or a hinderence?
I’m CJ Jackson and this is the Business Review.
Firms commonly hire former employees to audit them. It’s logical to assume their alumni may show bias to their former employer, but assistant professor of accouting, Dr. Owen Brown, says his research shows another side.
A lot of companies will hire people from their external audit team or the firm because there's a lot of just kind of natural benefits to doing that. To have those exiting relationships.
That’s not an uncommon practice, but there's been some concerns about how that practice of hiring from your audit firm could impact auditor independence or their objectivity. If you're interacting with somebody that used to be a member of your engagement team or that you used to work with, you might be inclined to be a little less impartial.
A law was put into place to protect employees and the public from accounting erros and wrongful financial practices.
The Sarbanes-Oxley Act was passed in large response to these accounting scandals that have happened around the early part of the 2000s. And one of the limitations that SOX put on was a company's ability to hire from their audit team.
So brown set out to find out if auditors act more favorably with their former employers. And what we see in the alumni condition is that auditors are paying more careful attention. If a company manager has an alumni affiliation and they engage with a persuasion tactic, then the auditor responds more punitively. Our results would suggest that auditors that had that type of social bond, that alumni affiliation, kind of rise to the occasion.
The business review is a production of KWBU, Livingston & McKay, and the Hankamer School of Business at Baylor University.