Leadership ability: Labor market outcomes, organizational benefits, and talent management in the auditing profession

Abstract

Leadership is considered a core competency for auditors. This study examines how auditors' leadership ability affects their labor market outcomes and audit firm performance. Using Swedish military data on qualified auditors (CPAs), we first show that auditors' leadership ability, measured at around age 18, is a strong predictor of their income and career success. However, our results also suggest that the audit labor market compensates for auditors' leadership ability at a much later stage than the general labor market. Second, we examine whether the value of leadership ability derives from higher-quality auditing, commercial performance, or both. We find strong evidence that leadership ability enhances auditors' commercial performance and some evidence on leadership ability being associated with higher audit quality. Third, at the audit firm level, we find that auditors' leadership ability significantly benefits audit firm performance measured as client portfolio size and audit firm profitability. Finally, we investigate leadership talent attraction and retention in the auditing profession. We find that the auditing profession attracts better leadership talent than the general labor market. Although nearly a quarter of CPAs leave the profession over the sample period, there is no significant difference in leadership ability between those who stay and those who leave. Overall, our results have important practical implications for audit firms' talent management.