The Role of Tacit Knowledge in Auditor Expertise and Human Capital Development

• DOI: http://doi.org/10.1111/1475-679X.12220
• Date: 01 September 2018
• Author: FRANK MOERS,MARK E. PEECHER,CASSANDRA ESTEP,JASMIJN C. BOL
• Published date: 01 September 2018

DOI: 10.1111/1475-679X.12220

Journal of Accounting Research

Vol. 56 No. 4 September 2018

Printed in U.S.A.

The Role of Tacit Knowledge

in Auditor Expertise and Human

Capital Development

JASMIJN C. BOL,

∗CASSANDRA ESTEP,

†FRANK MOERS,

‡

AND MARK E. PEECHER

§

Received 11 April 2016; accepted 13 April 2018

ABSTRACT

Two critical aspects of the model of auditor expertise development in Tan

and Libby [1997] are that audit firms do not value tacit knowledge in inex-

perienced auditors but do value it in experienced auditors. We update the

former and extend the latter. Our paper predicts and finds that audit firms

now do value tacit knowledge in inexperienced auditors, especially when their

supervisors have higher tacit knowledge. Our proxies of value include higher

promotability assessments, annual evaluations, and cash bonuses. Our paper

also extends Tanand Libby [1997] by positing that enhanced development of

expertise and audit firm human capital are two reasons audit firms value tacit

knowledge in experienced auditors. As predicted, higher tacit knowledge

in experienced auditors is positively associated with higher tacit knowledge

∗Tulane University; †Emory University; ‡Maastricht University; §University of Illinois at

Urbana–Champaign.

Accepted by Douglas Skinner. We thank Chris Agoglia, Bradley Bennett, Lori Bhaskar,

Kirsten Fanning, Kathryn Kadous, Bill Kinney, Lisa Koonce, Don Moser, Dave Piercey, Ta-

tiana Sandino, Mike Tiller, Brian White, Michael Williamson, two anonymous reviewers, and

workshop participants at the 2016 AAA Audit Midyear Meeting, the 26th Audit & Assurance

Conference held at the University of Oxford, Emory University, Erasmus University Rotter-

dam, Harvard Business School, Indiana University, Maastricht University, Tilburg University,

University of Amsterdam, University of Illinois at Urbana–Champaign, University of Kentucky,

University of Massachusetts–Amherst, University of Texasat Austin, and the Vienna University

of Economics and Business for helpful comments.

Data Availability: Data used in this study cannot be made public due to confidentiality agree-

ments with the participating firm and survey participants.

1205

CUniversity of Chicago on behalf of the Accounting Research Center,2018

1206 J.C.BOL,C.ESTEP,F.MOERS,AND M.E.PEECHER

acquisition by their inexperienced subordinates and with stronger firm com-

mitment of inexperienced subordinates having higher tacit knowledge.

JEL codes: M40; M41; M42; M51; M52

Keywords: tacit knowledge; audit expertise; performance evaluation; firm

commitment

1. Introduction

Tanand Libby [1997] introduced the idea that audit firms value tacit knowl-

edge in some auditors by predicting and finding it to be associated with

better annual performance evaluations, but only for experienced auditors

(managers) and not for inexperienced auditors (seniors/staff).1We build

on their study both by showing that audit firms now do value tacit knowl-

edge in inexperienced auditors, and by revealing how tacit knowledge helps

experienced auditors enhance inexperienced auditors’ expertise and audit

firms’ human capital.

Tacit knowledge helps people better manage themselves, others, and

their performance on socially interactive tasks (Wagner and Sternberg

[1985, 1987], Sternberg [1999], Hedlund and Sternberg [2000]). Rel-

ative to two decades ago, audit firms, like other business organizations

(Weinberger [2014], Deming [2017]), now more regularly assign socially

interactive tasks to inexperienced professionals. As examples, inexpe-

rienced auditors regularly complete fraud-risk brainstorming tasks that

require expression of their thoughts in team settings (Carpenter [2007]),

as well as analytical procedures tasks that involve asking open-ended ques-

tions of management (Trompeter and Wright [2010]). Still, audit partners

worry that inexperienced auditors avoid face-to-face communications

because they feel outmatched by management or poorly read manage-

ment during face-to-face communications (Bennett and Hatfield [2013,

2016]).

While concerns such as these exist about how proficiently inexperienced

auditors perform socially interactive audit tasks, at least one audit study

(Shankar and Tan [2006]) and several management studies show that tacit

knowledge enhances performance on such tasks (e.g., Wagner and Stern-

berg [1985, 1987], Matthew and Sternberg [2009]). We thus predict that

audit firms now do value inexperienced auditors who are better equipped

to perform such tasks, that is, those who possess greater tacit knowledge

(Nelson and Tan [2005]). We also predict an interaction stressing that

supervisors who determine whether tacit knowledge has value in inexpe-

rienced auditors matter, in line with prior research on the importance of

supervisor discretion in performance evaluation (e.g., Bol [2011]). Specif-

ically, we predict that higher tacit knowledge supervisors more highly value

tacit knowledge in inexperienced subordinate auditors.

1We use inexperienced to describe staff and seniors, and we use experienced to describe

managers.

THE ROLE OF TACIT KNOWLEDGE 1207

We argue that better supervision is one reason audit firms more highly

value experienced auditors with higher tacit knowledge. Indirect evidence

for this argument exists in that higher ranked audit supervisors, who likely

have higher tacit knowledge (Tan and Libby [1997]), provide less biased

evaluations of subordinates (Tan and Jamal [2001]). We directly examine

whether supervisors’ tacit knowledge is positively associated with their sub-

ordinates’ tacit knowledge and with stronger firm commitment of subor-

dinates with higher tacit knowledge. We posit this stronger firm commit-

ment arises because audit supervisors who possess higher tacit knowledge

provide subordinates with richer learning opportunities, and subordinate

auditors with higher tacit knowledge more highly value learning opportuni-

ties (Lepak and Snell [1999]). Employee tacit knowledge and commitment

are key dimensions of organizational human capital (e.g., Schultz [1961],

Becker [1964], Lepak and Snell [1999], Galunic and Anderson [2000]).

To test our first group of predictions, we use three indicators of the value

that audit firms place on the tacit knowledge of inexperienced auditors.

Like Tan and Libby [1997], we use annual performance evaluations. Ex-

panding on their one-indicator approach, we also examine medium term

and longer term promotability (cf. Grabner and Moers [2013], Bol and

Leiby [2018]) and shorter term bonus compensation, a tangible indica-

tor of value (Sternberg et al. [2000]). We examine both the main effect

of inexperienced auditors’ tacit knowledge and its interaction with their

supervisors’ tacit knowledge. To test our second group of predictions, we

examine both the tacit knowledge levels of inexperienced subordinate au-

ditors whose supervisors have higher, versus lower, tacit knowledge and

the association between subordinates’ firm commitment and their tacit

knowledge levels in interaction with their supervisors’ tacit knowledge

levels.

We test our predictions in two studies. In study 1, we use a mixed-method

approach featuring a qualitative field study, proprietary annual perfor-

mance evaluation data, and an employee survey at a mid-size Dutch audit

firm. We survey inexperienced subordinate auditors and experienced su-

pervisor auditors. We find that higher tacit knowledge in inexperienced

auditors is associated with better promotability and higher annual perfor-

mance evaluations, and that these associations are stronger when their su-

pervisors have higher tacit knowledge. We also find that subordinates ac-

quire higher tacit knowledge levels when their supervisors have higher tacit

knowledge. Further, higher tacit knowledge in subordinates is associated

with stronger firm commitment, but only if their experienced supervisors

also have higher tacit knowledge.

While study 1 findings support both sets of predictions, we subject our

first prediction to a generalizability test in study 2 using inexperienced au-

ditors from U.S. audit firms, including each Big 4 firm.2We do so because,

2To our knowledge, study 2 provides the first test of whether U.S. audit firms value tacit

knowledge in auditors of any rank. Tan and Libby [1997] use a Big 6 Singaporean audit firm.