taiwan auditor

Electronic copy available at: http://ssrn.com/abstract=2051198

Determinants of Audit Staff Turnover: Evidence from Taiwan

Abstract

High employee turnover has long been a concern in the public accounting profession. Frequent hiring, training, and replacement of professional staff could have an adverse impact on audit quality. Using proprietary data from a Big Four accounting firm in Taiwan, we employ survival analysis and examine the factors that explain the turnover of entry-level auditors. We find that female auditors are more likely to depart the accounting firm, while performance ratings, salary, and accounting background are significantly related to higher retention rates. We do not find, however, that master’s degrees incrementally increase the retention rates of professional employees. These results hold after controlling for macroeconomic factors. Our evidence complements prior survey studies and suggests that gender, performance, salary, and accounting degree explain employee turnover in Taiwanese public accounting firms. Keywords: auditor turnover, public accounting, gender, accounting education, survival analysis. JEL classification: M41, M42.

Electronic copy available at: http://ssrn.com/abstract=2051198

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Summary Prior research investigates personal characteristics and work-related factors that explain

auditor turnover behaviour including gender (Greenhaus et al. 1997), job performance (Farris

1971), stress (Collins and Killough 1992; Collins 1993), and job satisfaction (Bullen and

Flamholtz 1985; Parker and Kohlmeyer 2005). Most of the studies, however, rely on

questionnaires and surveys to gauge these factors from the perceptions of respondents. Also,

much prior research has operationalized turnover as “intent to resign” which may not adequately

capture actual turnover (Kirschenbaum and Weisberg, 1994; Tett and Meyer, 1993). Therefore,

the objective of this study is two-fold. First, we aim to provide large-sample, systematic evidence

using actual employee retention data to shed additional light on high turnover at public

accounting firms and provide insight into the successful retention of young talent in the

accounting profession. Second, our data is from firms in Taiwan, a country with an emerging

economy, which allows us to compare our results to previous results from other countries.

Using proprietary data from a Big Four accounting firm in Taiwan on all audit employees

that were hired for entry-level positions but had not been promoted to partners during the study

period, we employ survival analysis methodologies to examine the factors that explain auditor

retention.1 This data includes educational background, gender, performance ratings, and salaries

of audit employees. To control for macroeconomic conditions, we use stock market returns as a

proxy.

With regard to personal characteristics, we find that gender and a degree in accounting

are significantly associated with employee retention. Female auditors exhibit a lower retention

rate than males, while employees with a degree in accounting have a higher retention rate than

those without. On the other hand, we do not find that graduate education significantly increases

the retention rate. Our results suggest that a degree in accounting contributes significantly to

career success in public accounting. Graduate education in itself does not give an individual a

better chance of surviving in public accounting. Further, we find that better performance ratings

and high salaries are also related to a higher retention rate. This is consistent with results from

prior survey research regarding the relation between turnover and both job performance and job

satisfaction. Finally, our results are unchanged when we control for the macroeconomic

conditions that also influence retention.

1 The survival analysis methodology is described more fully in Section 3.1.

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1. Introduction High turnover at large public accounting firms has long been a critical issue facing the

profession. Hiltebeitel and Leauby (2001) find that less than half of accounting graduates who

choose public accounting for their first positions remained in the field three years after the start.2

High turnover introduces challenges for public accounting firms because hiring and training new

employees is costly.3 Further, a discussion paper by the British Financial Reporting Council

(FRC) suggests that failure to retain experienced and skilled staff can pose threats to the skill of

the audit team, and thus impair audit quality (FRC 2006).4

Job satisfaction is also related to the departure decision of accounting employees. A

survey by Bullen and Flamholtz (1985) suggests that higher job satisfaction is associated with

lower intention to depart. Further, prior research finds that employees' perceptions of career

development and extra-organizational job options (Bullen and Flamholtz 1985), levels of stress

inside and outside organizations (Collins and Killough 1992), and organizational culture (Parker

and Kohlmeyer 2005; Sheridan 1992) are the underlying factors that influence job satisfaction,

and hence employees' intention to leave.

According to the Survey Report of Audit Firms in Taiwan published by the Financial

Supervisory Commission, high turnover and a shortage of experienced and skilled audit staff

have constantly been among the top five challenges facing public accounting firms.5 This

suggests that the continuing loss of young professional employees in accounting firms is a

pervasive issue not only in the U.S. but around the world. While factors such as gender,

performance, and job satisfaction appear to explain the turnover in general, limited evidence

exists as to the relative significance of each factor in explaining employee turnover. Further,

differences in culture and educational requirements for accounting graduates may result in

different associations between personal and work-related factors and the turnover behaviour

across countries.

2 Specifically, Hiltebeital and Leauby (2001) show that only 23.5 percent of new accounting hires remained in the

field three years after starting, compared to 55.8 percent of accounting graduates who chose public accounting for their first positions.

3 As an example, an international accounting firm once estimated that hiring and replacing an existing employee costs about 150 percent of that employee’s annual salary (Hiltebeitel and Leauby 2001).

4 The FRC report suggests four main drivers of audit quality: (1) the culture within an accounting firm; (2) the skills and personal qualities of audit partners and staff; (3) the effectiveness of the audit process; and (4) the reliability and usefulness of audit reporting.

5 The top five challenges noted are fierce competition, decreasing demand for audit service, high turnover for audit staff, shortage of experienced audit staff and high personnel costs.

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We extend previous auditor turnover research in three ways. First, due to the lack of

publicly available data for actual auditor turnover, most prior research resorts to surveys or

questionnaires to gather data for auditor turnover intentions. We are able to directly examine

actual auditor turnover using a proprietary data set from a large public accounting firm. While

turnover intentions may be positively correlated with actual turnovers (Parasuraman 1982;

Fishbein and Ajzen 1975), and hence can be used as a reasonable proxy for actual turnover, these

two concepts are fundamentally different and may be affected by different factors.

Kirschenbaum and Weisberg (1990) highlight the fact that actual turnover requires both a

turnover intention as well as the availability of a job opportunity matching the employee’s

prospective employment criteria. In addition, empirical evidence indicates that turnover

intentions and actual turnover are determined by different factors. Specifically, the employee’s

age, length of employment, salary, and assessment of career advancement are significantly

associated with actual turnover but not with turnover intention (Kirschenbaum and Weisberg

1994).

Second, we bring an advanced econometric tool, survival analysis, to an accounting

context to assess the impact of employee-specific variables on the auditor turnover rate. Our

proprietary dataset provides us with information pertaining to not only whether or not an

employee has left the firm, but also the amount of time that an employee has worked at the firm.

Using the survival analysis methodology, we can estimate the probability that an auditor will

leave the firm at a certain time. More importantly, we can compare the turnover probabilities for

different groups, such as male vs. female auditors.

Third, most prior research focuses mainly on public accounting firms in the U.S.

We show that, in a sample of Taiwanese auditors, an accounting background is critical to the

career success of an individual in public accounting but graduate education itself does not

significantly increase the retention rates of professional employees. These findings suggest that

public accounting is a highly specialized profession that requires solid accounting education. To

the extent that the Taiwanese auditors in our study are similar to auditors in other countries, our

study has significant implications for the hiring strategy of public accounting firms. In addition,

we reveal that the high turnover of female auditors also occurs outside the U.S. Given the

increase in female accounting graduates over the years (Pillsbury et al. 1989; AICPA 2004;

AICPA 2009), our study mirrors the continuing call for improved retention of young female

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talent in the profession. We expect Taiwanese auditors to be similar to auditors in the U.S.

because the profession is relatively similar, regardless of geographic location, with respect to the

vast amount of technical expertise, business and communication skills required by employees, as

well as the high-stress environment facing auditors. However, there may be differences between

U.S. and Taiwanese auditors considering that we are examining the profession in a very different

culture.

The remainder of the paper is organized as follows. Section 2 reviews related literature

and presents our hypotheses. Section 3 discusses our research design and data. Section 4 reports

the results and Section 5 concludes.

2. Related Literature and Hypotheses Development High turnover has been a major concern in large public accounting firms (FRC 2006).

This study focuses mainly on personal characteristics as explanations for voluntary departure of

professional employees. We focus on personal characteristics for two main reasons. First,

turnover is costly to firms (Hiltebeitel and Leauby 2001) and we assume that public accounting

firms would benefit from having more information about which personal characteristics are

associated with turnover. This would help firms adjust recruiting and hiring decisions and may

encourage them to counsel employees and support programs that would help maintain employee

satisfaction and performance. Second, prospective employees of public accounting firms may

benefit from a deeper understanding of the characteristics that are associated with employee

turnover so that they are better prepared for the decision to pursue public accounting. Consider,

for example, a prospective female employee who is concerned that gender may be associated

with turnover. She may decide to pursue a certain type of education (either major in accounting

or pursue a master's degree) in order to offset a potential increased turnover risk attributed to

gender. If prospective employees make better employment decisions, this will not only benefit

the employee but the public accounting firm as well.

Gender

Gender is perhaps the most-studied personal characteristic in explaining the departure

decisions of employees of accounting firms. A 2004 AICPA report notes that since 1986 over 50

percent of accounting graduates have been women, and by 2004 women made up 56 percent of

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new entrants into public accounting. Female auditors, however, have not progressed into senior

positions at the rate of their male counterparts, especially at larger accounting firms. For instance,

the same AICPA report indicates that women comprise 19 percent of partners on average, with a

low of 12 percent for larger firms (AICPA 2004).

Academic evidence mirrors the low percentage of female partners and shows that female

auditors are more likely to leave public accounting than male auditors (Pillsbury et al. 1989;

Rasch and Harrell 1990).6 Dalton et al. (1997) investigate four aspects of the contemporary

public accounting environment that concern the departure of accounting professionals:

competitive environment, work/non-work obligations, internal/external control and supervision,

and litigation risk. Despite significant associations of the four factors with employee turnover,

female partners and managers differ significantly from their male counterparts only in work/non-

work obligations. This suggests that intense work commitment and non-work obligations are

likely to exert more pressure on female professionals. Similarly, Collins (1993) studies

differences in stress between the two genders and attributes high departure rates of female

auditors to their greater levels of stress. On the other hand, Greenhaus et al. (1997) find that

career-related reasons, rather than family-related ones, cause the high turnover of female auditors.

Collin et al. (2007) support the contention that considerations of gender before and during an

auditor's employment influence the treatment, performance, and perceptions of auditors, both

male and female. Collectively, prior research shows that both conventional reasons like family

pressure and job commitment as well as career-related reasons contribute to the high turnover of

female auditors. This high level of turnover is especially ironic when considered in light of the

findings of O'Donnell and Johnson (2001) that female auditors demonstrate a superior ability to

address complex problems than do their male counterparts. Because the aforementioned studies

suggest that females have higher turnover than males, we therefore test the following hypothesis:

H1: The turnover rate of females is greater than the turnover rate of males.

Master's Degree

Several studies examine the association between graduate education and the turnover of

accountants using U.S. data. Alford (1990), Siegel (1987), and Wright (1988) consistently find

that individuals who hold a master's degree have better performance, advance more rapidly, and

6 See Pillsbury et al. (1989) for a summary of earlier studies on women in public accounting.

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exhibit lower turnover rates in accounting firms than undergraduates with an accounting major.

The master's degrees in consideration include an MS, an MAcc, or an MBA with an accounting

concentration. These findings provide two implications. First, they suggest that the 150-hour

rule, which requires individuals to complete 150 hours of instruction to sit for the CPA exam in

the U.S., results in increased retention rates at accounting firms. Second, MBAs who select

accounting as their concentration are more likely to achieve career success in accounting firms

than undergraduate accounting majors, even though MBAs may not have the same depth of

accounting knowledge. Wright (1988) attributes the comparative advantages of MBAs over

undergraduate accounting majors to maturity, stronger communication skills, broader business

knowledge, and leadership capabilities.

In Taiwan, the 150-hour rule is not required for individuals to sit for the CPA exam. As a

consequence, the percentage of professional employees in accounting firms in Taiwan who hold

a master’s degree is lower than that of their counterparts in the U.S.7 Furthermore; the

accounting profession in Taiwan has voiced the desire to hire more non-accounting graduates or

MBAs. The rationale is that the employees at accounting firms should possess broad knowledge

and strong analytical and communication skills in addition to traditional accounting training so

they can better adapt to a rapidly changing business environment and technological changes in

information systems. This rationale is consistent with the conclusion of DeNardo and Thornton

(1982) that MBAs are often perceived to have several comparative advantages over

undergraduate accounting majors, including maturity, increased ambition, and broader

background. We therefore investigate whether graduate education, considered purely as an

additional level of education rather than as specialized accounting training, affects the retention

rates of professional employees at accounting firms in Taiwan as it does in the U.S. Due to the

discrepancies in educational requirements and percentages of professional employees who hold a

master’s degree, it remains unknown whether graduate education has similar implications for

career success in public accounting outside the U.S. This leads to our second hypothesis, stated

in the alternative form:

H2: The turnover rate of an employee without a master’s degree is greater than the turnover rate of an employee with a master’s degree.

7 The annual survey by Taiwan Financial Supervisory Commission (FSC 2009) shows that about 10.5 percent of new hires at the accounting firms in 2007 hold a master’s degree, much lower than the 26 percent of their counterparts in the U.S. Also, the survey reveals that of senior audit staff and managers, only 14.5 percent and 21.4 percent hold a master’s degree, respectively.

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Accounting major

Not only has there been a recent trend in the increased hiring of graduates with a master’s

degree but also of non-accounting majors in the 2007-2008 academic year. However, while the

majority of surveyed firms say that they expect to hire roughly the same percentage of non-

accounting majors in coming years, the AICPA also reveals the contrasting trend that 16 percent

of the surveyed accounting firms plan to reduce hiring of non-accounting graduates (AICPA,

2009). This contrast raises the question of whether the entry-level auditors who lack an in-depth

accounting background are less likely to survive in public accounting. Our study therefore adds

to the literature by investigating whether having an accounting background affects the turnover

of the professional employees at accounting firms in Taiwan. This leads to our third hypothesis,

stated in the alternative form:

H3: The turnover rate of an employee without a major in accounting is greater than the turnover rate of an employee with a major in accounting.

Performance and Salary

Although our study focuses on personal characteristics, we also analyse the impact of

performance and salary on auditor turnover. In a study of nearly 3,000 audit and tax employees

from twelve public accounting firms in the U.S., Barkman et al. (1992) find that employees

classified as high performers had significantly longer tenure at accounting firms compared to

employees classified as low performers. It took more than forty months before half of the high

performers left their firms while it took just 26 months for half of the low performers to leave

their firms (Barkman et al. 1992). Farris (1971) studies turnover of scientists and engineers at

two different organizations and finds mixed results. Respondents who classify themselves as

high performers had lower turnover than low performers did at one of the two organizations, but

there was no difference in turnover between high and low performers at the other organization

(Farris, 1971). In a discussion of prior literature, Jackofsky (1984) categorizes the empirical

relationship between employee performance and job turnover into three categories; studies

finding a positive relationship between the two variables, studies finding a negative relationship

between the two variables, and studies finding no relationship between the two variables.

Because of the inconsistency in the relationship between performance and turnover, our next

hypothesis is stated in the null form:

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H4: The turnover rate of employees with lower performance evaluations does not differ from the turnover rate of employees with higher performance evaluations.

In addition to job performance, salary is also expected to play a role in the job turnover

decision. Marxen et al. (1996) conduct a telephone survey of former employees of the six largest

accounting firms at the time (i.e. Big 6) in six major cities across the US, in order to better

understand alumni’s experiences before, during, and after employment. When asked to identify

their primary decision for leaving the firm, salary was the second most popular answer.8 Indeed,

Farris (1971) finds that turnover is negatively associated with income and Albrecht et al. (1981)

find that compensation is an area of dissatisfaction for both junior and senior level accountants.

This leads to our last hypothesis, stated in the alternative form:

H5: The turnover rate of employees with lower salaries is greater than the turnover rate of employees with higher salaries.

3. Research Design 3.1 Methodology

We employ survival analysis to examine factors that might explain the retention rates of

professional employees. The survival analysis methodology is commonly used in the field of

medicine because medical researchers are often interested in the length of time for a particular

outcome to take place or in comparing the time until the event occurs for two or more groups.

For example, researchers may be interested in the survival time of a group of patients that

received an organ transplant or researchers may define survival time as the time in remission and

compare the survival times of two groups of patients where one group is receiving treatment and

the other group is not. The first main benefit of survival analysis is that it allows us to determine

how and why an event occurs, not just whether or not an event occurred. For example, a

researcher can determine patients’ time in remission and for those whose disease returns, the

time of the relapse. This information allows the researcher to determine, at any time during the

study period, the likelihood that a patient will relapse. Moreover, the researcher can examine the

impact of treatment on the likelihood that a patient will relapse at any given time during the

study period. Probit or logit estimation can help the researcher determine the impact of treatment

on the likelihood of relapse but would treat those that relapsed early in the study period the same 8 The most popular response was “less demanding”.

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as those that relapsed later in the study period. The second main benefit of survival analysis is

that censored data is accounted for properly. Referring to the previous example, the disease may

return for a patient after the study has been completed. This patient would be included in the

study as having survived until the completion of the study and therefore the outcome would be

considered “right-censored”. Survival analysis accounts for the fact that survival changes over

time; OLS estimation results would not be as meaningful as OLS would estimate coefficients at

some fixed point in time.

Survival analysis is comprised of two functions; the survivor function, S(time), and the

hazard function, h(time). The survivor function is defined as the probability of an individual

surviving (i.e. maintaining employment) beyond a specified time (t). The hazard function

provides the estimated rate at which an individual will not survive (i.e. will leave the firm) at

time (t) given that the individual has survived (i.e. maintained employment) up to time (t).

Survival analysis is usually written and discussed in terms of the hazard function such that the

rate at which an event occurs is referred to as a hazard rate.

In this study, we define survival as the auditor’s length of employment at the public

accounting firm and the hazard as the rate of leaving the firm given that the auditor has remained

with the firm for a specific amount of time. We compare the hazard rates of several groups;

females versus males, accounting majors versus non-accounting majors, graduates of a master’s

program versus graduates of a bachelor’s degree, lower performers versus higher performers, and

lower salary levels versus higher salary levels. The hazard rate has been used in previous

accounting studies for the purposes of examining the rate of client defections during the demise

of Arthur Andersen (Barton 2005; Asthana et al. 2010), the rate of firms’ financial covenant

violation (Zhang 2008), and the rate of firms breaking a string of earnings increases (Beatty et al.

2002), among others.

We first compute the retention time (time) for each newly hired employee as the number

of months that elapsed between his/her hiring and departure dates. The retention time is censored

for active employees since their total length of employment is unknown. The survival rate

function, S(time), denotes the probability of the length of employment that is at least equal to

time. The hazard rate function, h(time), estimates the probability of employees departing in the

next month given that they have survived through the current month. In equations (1) – (3)

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shown below, we present Cox’s (1972) proportional hazards model. We do not derive the

formulas shown below as these are the standard formulas used to estimate the hazard rate.

h(time) = h0 (time) exp(β1Gender + β2Major + β3Degree + β4Rating + β5Salary + β6Return) (1)

where:

time = the length of employment through the current month, subject to right-censoring;

h0(time) = an arbitrary baseline hazard function; Gender = 1 if the auditor is female and 0 otherwise; Major = 1 if the auditor majored in accounting and 0 otherwise;

Degree = 1 if the auditor has a master’s degree and 0 otherwise;; Rating = 1 if the annual evaluation rating falls into the bottom 10%, 2 if the

annual evaluation rating falls into the middle 80%, and 3 if the annual evaluation rating falls into the top 10% (in order to combine data from two firms before a merger with the resulting firm after the merger);

Salary = individual auditor’s salary relative to the mean salary of all audit staff, which is set to 100; and

Return = market returns for the year.

Because prior research indicates that employees are more likely to voluntarily terminate their

employment when other job opportunities are more readily available, we control for alternative

job opportunities by including a measure of stock market returns for the year because we assume

that when market conditions are more favourable, job opportunities are more easily available.

We expect to find that stock market returns are positively associated with auditors’ turnover rate.

Returning to equation (1), we note that it can also be written as follows:

h(time ) h0(time ) exp( EiXii 1

n

¦ H)

where Xi represents factors explaining voluntary termination of employment and βi represents

estimated regression weights. Over time, the hazard function can increase, decrease or remain

constant, which is derived by the magnitude of the estimated coefficient of variables of interest.

We use X1 as an example to explain the model. Holding everything else constant, when X1

increases one unit, Eq. (1) can be rewritten as:

h'(time) h0(time) exp(E1(X1 1) EiXii 2

n

¦ H) (2)

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By dividing Eq. (2) by Eq. (1), we obtain the following:

h'(time )/h(time ) exp(E1) (3)

The ratio of the two hazards is thus . If the hazard function is increasing, then is

larger than one. In other words, an estimated negative implies that the hazard function is

decreasing. If equals one, then the hazard function is constant. If X1 represents Gender,

then equation (3) estimates the ratio of the female hazard rate to the male hazard rate which

allows us to estimate the difference in turnover rate for females and males.

3.2 Data

We have obtained a proprietary dataset on professional employees who started in entry-

level positions in a Big Four accounting firm in Taiwan from 1996 to 2005 but had not been

promoted to partner at the time the data was obtained. 9 This dataset contains information

regarding the employee’s length of employment with the firm, his/her gender, whether he/she

majored in accounting, whether he/she has a master’s degree, and his/her annual evaluation

rating. Due to confidentiality concerns, the dataset does not provide the employee’s salary;; rather,

his/her salary relative to the mean salary of all auditors in the accounting firm is provided.

Because a merger took place during our sample period, our sample contains professional

employees who started as entry-level auditors in the merged firm or in its two predecessors.

Since the evaluation ratings are not directly comparable between the two pre-merger accounting

firms and the evaluation rating system changed post-merger, we follow the suggestion of the

Human Resource Department of the post-merger accounting firm and convert the performance

ratings into a three-point scale.10 We exclude employees with tenure of less than six months as

they are in a probationary period. Our final sample therefore consists of 3,025 auditors. Finally,

we obtain the stock market return information from The Taiwan Economic Journal. Table 1

reports our sample distribution by year.

9 All historical data on partners was removed from the sample we obtained from the firm for confidentiality reasons,

so we cannot include promoted staff in our analysis. This data limitation confines our analyses to the entry-level auditors, senior staff auditors, and managers of the firm.

10 Please see the variable definition for Rating for details.

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_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Insert Table 1 Here

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

4. Empirical Results 4.1 Descriptive Statistics

Table 2 reports the turnover rate across time. Because entry-level auditors in large audit

firms in Taiwan typically sign a two-year contract, turnover peaks after two years of employment

(at the 24th to the 30th month of employment). Fifty percent of new auditors’ tenures last less than

30 months, and 87 percent of new auditors’ tenures less than 60 months.


_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Table 3, Panel A shows that 2,320 auditors (about 77 percent) leave the firm during our

sample period, and 705 auditors (23 percent) remain employed with the firm at the end of the

sample period. Because the data is censored, the mean 36 months of employment for all auditors

underestimates the true average tenure. This is because we don’t know survival length exactly;;

an auditor may leave the firm after the data is collected which would increase the mean length of

unemployment if the study period had continued. Median employment, on the other hand, is free

of this downward bias. The median length of employment for all auditors is 30 months. The

median of departed auditors is 27 months, and the median of those who remain at the firm is 35

months.


_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Panel B of Table 3 reports the distribution of the accountant’s tenure by personal

characteristics (Gender, Major and Degree). With regard to gender, the median length of

employment for male and female auditors is 33 months and 28 months, respectively. This

suggests that male auditors have longer tenure than their female colleagues. The first and third

quartiles exhibit a similar pattern. Further, newly hired auditors who were accounting majors

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have a longer median tenure with the firm (32 months) than non-accounting majors (24 months).

In contrast, the median tenure of auditors who hold a master’s degree is 27 months, which is

lower than the median tenure of 32 months for those who do not have a master’s degree.

Together, the descriptive statistics suggest that male auditors and accounting majors in Taiwan

appear more likely to stay longer in a public accounting firm than female auditors and non-

accounting majors. Graduate education, on the other hand, does not increase the retention rates

of new hires in Taiwan.

Figure 1 depicts the Kaplan-Meier curve of the survival probability (Kaplan and Meier

1958). Male auditors (the dotted line in Panel A) have a higher retention probability after the 25th

month than female auditors. Accounting majors (the solid line in Panel B) have a significantly

higher retention probability than non-accounting majors for the first 60 months of employment

or so. Panel C indicates that there is very little difference in the retention probability between

Taiwanese auditors with a master’s degree and auditors without a master’s degree.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Insert Figure 1 Here

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

4.2 Multivariate Results

Table 4 reports our results for the Cox proportional hazards model. Note that data

requirements for performance ratings, salary, and stock returns further result in a loss of 726

observations. Our sample size therefore differs according to the model specifications. Models 1

and 2 are tests that include only personal characteristics, but they use the full and restricted

samples, respectively.

Equation (3) was estimated separately for each of the six models. Estimating Model 1

using equation (3) indicates that the ratio of the female hazard rate to the male hazard rate is

1.1955. Because the hazard rate is the probability at a given time of leaving the firm, females are

19.6% more likely to leave the firm. Model 2, which differs from Model 1 because it uses the

restricted sample, indicates that females are 1.3755 or 37.6% more likely to voluntarily depart

from the firm. In each of the five models estimated, female auditors are significantly more likely

to leave the firm than their male counterparts (p-values<.01), consistent with our first hypothesis.

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Referring back to equations (1) through (3), if we assume that X1 represents Degree, then

equation (3) estimates the ratio of the hazard rate (i.e. the rate at which an auditor will leave the

firm) of an employee with a master’s degree to the hazard rate of an employee without a master’s

degree. The coefficient on Degree, however, is not statistically different from 1 in any of the six

models, suggesting that newly hired auditors holding a master’s degree have about the same

probability of leaving the firm as those without a master’s degree. The insignificance of master’s

degrees in explaining the turnover of professional employees in Taiwan is different from the

results of prior literature using U.S. data and does not support our second hypothesis.

Our third hypothesis predicts that the turnover rate of non-accounting majors is greater

than that of accounting majors. Consistent with this prediction, the coefficients on Major in each

of the six models range from 0.7473 to 0.8282 (p-values < 0.05), indicating that the probability

of accounting majors leaving the firm is only 75 to 83 percent as high as it is for non-accounting

majors. Our findings suggest that in Taiwan appropriate accounting education is more likely to

increase the retention rate than graduate education in general.

Model 3 and Model 5 include performance ratings in the model specifications when

estimating Equation (3). Model 3 includes all three personal characteristics as well as

performance rating and indicates that the probability of auditors with a high rating leaving the

firm is only 73 percent as high as auditors with a low rating. Model 5 includes all three personal

characteristics, performance rating and salary and the results found in Model 3 are unchanged

with respect to performance rating. In both models 3 and 5, turnover is lower for auditors with a

high performance rating (p-values<.01) and the results on Gender, Major, and Degree remain

similar.

Models 4 and 5 indicate the impact of salary on auditor’s likelihood of leaving the firm.

Due to concerns about confidentiality, the salary data we have obtained are relative to the

average salary of all professional employees, which is set to 100. Results of estimating equation

(3) indicate that the probability of an auditor with a high salary leaving the firm is about 76-78

percent as high as the probability of an auditor with a low salary leaving the firm. Results of

Models 4 and 5 indicate that salary is significantly associated with auditor turnover, consistent

with hypothesis 5, and the results for Gender, Major, and Degree remain similar.

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_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

In Model 6, we control for market returns, which capture economic conditions and extra-

organizational options, and include all predictor variables when estimating equation (3). The

coefficient on Return is 1.0217 (p-value < 0.01), suggesting that when economic conditions are

good, professional employees at the accounting firm are more likely to leave the firm. The

results for personal characteristics, performance ratings, and salaries remain intact. We also

measure economic conditions with gross domestic product (GDP) instead of market returns and

note that the (untabulated) results remain unchanged.

Collectively, we find that gender, academic background in accounting, performance, and

salary, but not a master’s degree, significantly explain the retention rate of professional

employees in Taiwan. This holds true even after controlling for economic factors.

5. Conclusion The development and quality improvement of public accounting require dedication and

commitment of professional accounting staff. Analyses of the factors affecting the retention rates

in accounting firms not only benefit accounting firms’ human resource management, but also

help young auditors plan their careers. We use proprietary data to study the turnover of

Taiwanese auditors. The use of the survival analysis methodology in our analysis has two

important benefits. First, it allows us to estimate not only whether certain characteristics are

associated with turnover, but also how certain characteristics are associated with the length of

time in which an employee remains with the firm. Second, survival analysis is not affected by

the fact that some employees have not left the firm at the time that the study was concluded.

Our results suggest that female auditors have higher turnover rates and that those with an

academic background in accounting have lower turnover rates. Further, we find that auditors

with better performance ratings and higher salaries have longer tenure at the accounting firm.

Unlike previous studies using U.S. data, however, we find that graduate education is not a

significant factor in explaining turnover. These results are unchanged when controlling for

economic conditions.

16

To the extent that our results generalize to other countries, they provide implications for

the retention of young talent in accounting firms. The higher turnover rate we find with female

auditors suggests that accounting firms can improve the retention rate by devoting more

resources to the career development of female professionals, providing them with more support,

and reducing their stress from the conflict between work and family. Further, our findings have

implications for accounting education. We show that accounting education improves one’s

chances of surviving in a public accounting firm. While recruiting non-accounting graduates has

its merits, accounting firms may need to provide intense training to increase their chances of

success in the firm. We also find that performance ratings and salaries are positively related to

retention rates, suggesting that positive and monetary encouragement to well-performing

auditors is more likely to help in retaining young professionals. Finally, our findings suggest that

when professional employees have better opportunities outside the accounting firm, especially

when the economy is good, accounting firms should provide early solutions to retain employees.

To the existing literature, our study adds data on an international setting and provides further

analysis of factors that are associated with the turnover of professional employees. We offer

insights into the development of methods to increase retention rates, which can be assumed to

improve audit quality.

We note that our study is subject to several limitations. First, we are unable to include

data on partners of the firm and we are unable to use position level of the auditor in our analysis.

Second, our data is compiled from auditors in Taiwan and to the extent that the culture and

economics of Taiwan differ from those in other countries, our results may not generalize to

auditors on a global level.

We suggest that future research expand our analysis by interviewing or surveying

auditors to try to gain a better understanding of why personal characteristics such as gender are

associated with turnover and why a graduate degree is not. With more information, accounting

firms can improve their hiring and retention strategies. Future research might also usefully

extend this study to include auditors beyond entry level; of especial interest might be an analysis

that maps gender onto the increasing levels of complexity of the tasks assigned to auditors as

they get promoted and gain experience and the trust of their firms.

Muhammad Sidiq

17

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Table 1

Number of Auditors by Year

Year No. of Auditors Percentage (%)

1996 144 4.76 1997 220 7.27 1998 233 7.70 1999 251 8.30 2000 306 10.12 2001 280 9.26 2002 336 11.11 2003 350 11.57 2004 456 15.07 2005 449 14.84 Total 3,025 100.00

21

Table 2

Distribution of Tenure

All Auditors Departed Auditors

From (month) To (month) Probability Cumulative Probability Probability Cumulative

Probability 7 12 8% 8% 1% 1% 13 18 7% 15% 1% 2% 19 24 15% 30% 20% 22% 25 30 20% 50% 14% 36% 31 36 12% 62% 14% 50% 37 42 11% 72% 10% 61% 43 48 6% 78% 6% 67% 49 54 5% 84% 6% 72% 55 60 4% 87% 4% 76% 61 66 3% 90% 2% 78% 67 72 2% 92% 3% 82% 73 78 1% 93% 1% 82% 79 84 1% 94% 4% 87% 85 90 1% 96% 1% 88% 91 96 1% 97% 2% 90% 97 102 1% 97% 1% 91% 103 108 1% 98% 3% 94% 109 114 1% 99% 1% 95% 115 120 1% 99% 2% 98% 121 126 0% 100% 1% 99% 127 132 0% 100% 1% 100% 133 138 0% 100% 0% 100%

22

Table 3

Descriptive Statistics a

Panel A: Overall

Departed Auditors

Remaining Auditors

All Auditors

Number of Auditors 2,320 705 3,025 Tenure (in months) Mean 32.9 46.1 36.0 Min 7.0 7.0 7.0 Q1 21.0 24.0 22.0 Median 27.0 35.0 30.0 Q3 41.0 57.0 45.0 Max 132.0 137.0 137.0

Panel B: By Personal Characteristics

Gender Major Degree Male Female Accounting Other Master's Lower Number of Auditors 1,211 1,814 2,516 509 1,046 1,979 Tenure (in months) Mean 38.3 34.4 36.5 33.4 35.2 36.4 Min 7.0 7.0 7.0 7.0 7.0 7.0 Q1 22.0 21.0 23.0 18.0 21.0 23.0 Median 33.0 28.0 32.0 24.0 27.0 32.0 Q3 48.0 42.0 46.0 37.0 40.0 46.0 Max 137.0 136.0 137.0 136.0 136.0 137.0

a. Sample period from 1996 to 2005, including all auditors that entered the accounting firm as entry-level auditors, excluding those with tenure less than six months.

23

Figure 1

Kaplan-Meier survival probability curve by personal characteristicsa

Panel A: By Gender

Male

Female

0.00

0.25

0.50

0.75

1.00

Pro

babi

litie

s

0 50 100 150Months

Kaplan-Meier Survior Function

Panel B: By Major

accounting major

non-accounting major

0.00

0.25

0.50

0.75

1.00

Pro

babi

litie

s

0 50 100 150Months


24

Figure 1

Kaplan-Meier survival probability curve by personal characteristics (Cont’d)

Panel C: By Degree

with master's degree

without master's degree

0.00

0.25

0.50

0.75

1.00

Pro

babi

litie

s

0 50 100 150Months


a. The x-axis is time (in number of months), and the y-axis is retention probability (between 0 and 1).

25

Table 4

Survival Analysis Results

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Gender 1.1955 1.3755 1.3909 1.3713 1.3874 1.4036

(0.008) (0.001) (0.001) (0.001) (0.001) (0.001)

Major 0.8282 0.7473 0.7507 0.7454 0.7494 0.7565

(0.026) (0.021) (0.023) (0.020) (0.022) (0.027)

Degree 0.9557 0.9324 0.9366 0.9305 0.9349 0.9146

(0.522) (0.495) (0.523) (0.482) (0.511) (0.384)

Rating 0.7335 0.7274 0.7264

(0.001) (0.001) (0.001)

Salary 0.7753 0.7633 0.7761

(0.061) (0.047) (0.063)

Return 1.0217

(0.000)

Sample Size 3,025 2,299 2,299 2,299 2,299 2,299

LR-statistic 12.37 17.19 28.15 20.52 31.88 105.95

p(LR) (0.006) (0.001) (0.000) (0.000) (0.000) (0.000)

Note: Numbers reported in parentheses are two-tailed p-values. Variables are defined below: Gender = 1 if the auditor is a female; and 0 otherwise; Major = 1 if the auditor majored in accounting, and 0 otherwise; Degree = 1 if the auditor has a master's degree, and 0 otherwise; Rating = 1 if the annual evaluation rating falls into the bottom 10 percent, 2 if the annual evaluation

rating falls into the middle 80 percent, and 3 if the annual evaluation ratings falls into the top 10 percent;

Salary = individual auditor's salary relative to the mean salary of all audit staff, which is set to 100; and Return = market returns of the current year.