Accounting-employee flows and financial reporting quality

Although many firms are concerned about the difficulty in hiring, training, and retaining qualified accounting staff, the human capital of rank-and-file employees is difficult to measure, and its link to a firm's financial reporting quality (FRQ) thus remains largely an open question. We use novel time-series data to examine how different aspects of accounting-employee flows, as measured by its three primary components—(1) churning, (2) net attrition, and (3) net hiring of accounting employees—explain FRQ. We find that accounting-employee flows, particularly churning, are positively associated with firms disclosing internal control weaknesses, misstating annual financial reports, exhibiting higher abnormal accruals, filing late annual reports, and issuing less timely earnings announcements. We also find that accounting-employee flows are associated with higher audit fees and inaccurate management forecasts. Our study provides new evidence that employee instability within the financial reporting department predates the revelation of FRQ issues.