Events

Prof. Xuefeng Jiang
Eli Broad Endowed Professor in Accounting
Department of Accounting and Information Systems
Michigan State University

We examine why audit firms succeed in consulting markets and what this implies for audit quality. We argue that the audit practice serves as a reputation platform for consulting: audit reputation is verifiable through regulatory oversight and litigation exposure, while consulting reputation is not, allowing consulting units to draw on the audit franchise for client credibility. Using job postings across 603 U.S. audit offices from 2011 to 2023, we find that severe client restatements raise audit hiring but reduce tax and consulting hiring. In a stacked difference-in-differences design, tax and consulting postings fall by 9 to 12 percent relative to never-treated offices, with larger declines following more severe restatements, in offices with smaller consulting units, and no decline for Deloitte. Realized employee flows show the same contraction. Our findings identify a reputational channel through which joint provision raises the cost of audit failures and strengthens incentives to maintain audit quality, implying that broad consulting restrictions risk severing it.