Tacit Knowledge, Audit Quality, and Talent Identification

The accounting literature has recently transitioned from the focus on client- or audit firm-level characteristics and their relation with audit quality to the inclusion of audit partner and team effects in audit quality. We extend this literature by studying whether tacit knowledge is a relevant factor in achieving high audit quality. Using survey measures and unique proprietary data of a Big 4 firm, we find evidence that the engagement partners’ level of tacit knowledge explains variation in audit quality as defined by the firm’s internal assessment of audit quality. Given its value-creating character, we subsequently examine whether tacit knowledge is a criterion that is incorporated in the talent identification process. We find that tacit knowledge is largely ignored or even negatively correlated with the firm’s assessment of potential, which likely provides an explanation for the loss of talent in professional audit firms