Leadership Ability: Labor Market Outcomes, Organizational Benefits, and Talent Management in the Auditing Profession

In this paper, we first examine how auditors’ leadership ability affects their labor market outcomes. Using unique Swedish military data on qualified auditors (CPAs), we show that auditors’ leadership ability, measured at the age around 18, is a strong predictor of their income and career success. However, our result also suggests that the audit labor market compensates for auditors’ leadership ability at a much later stage than the general labor market does. Second, to examine why the audit labor market rewards leadership ability, we find that leadership ability significantly enhances auditors’ commercial performance, but we do not find convincing evidence that leadership ability is associated with audit quality. Third, at audit firm organizational level, we find that auditors’ leadership ability significantly benefits audit firm performance measured as client portfolio size and audit firm profitability. Finally, we investigate the extent of talent attraction/retention within the audit profession. We find that the auditing profession attracts better talent than the general labor market, and that Big 4 firms attract better talent than non-Big4 firms. However, the auditing profession loses a large share of talent over time, even though the talents of those who stay and those who leave are, on average, similar.