Network Structure and Auditor Compensation: Evidence from a Small World Bipartite Network

This study examines the relationship between auditors’ tacit knowledge transfer and auditor compensation. We exploit a unique proprietary sample and employ small-world theory in social network analysis to capture tacit knowledge transfer among individual auditors. Drawing from an audit firm’s full year of personnel records and data on the assignment of individual auditors to audit engagements throughout the year, we find a statistically significant positive association between tacit knowledge transfer and auditor compensation. Furthermore, we find that this positive association is mainly driven by assistants, audit seniors, and audit managers. Finally, we find that auditor performance is likely to be a valid mechanism linking tacit knowledge transfer and auditor compensation for audit seniors and audit managers. Overall, our results suggest that the social capital embedded within knowledge networks plays an important role in auditor compensation.