The Effects of Promotion Patterns Within Audit Firms on Audit Adjustments: Insights Into Promotion Speed and Flexibility

ABSTRACT

This study investigates how promotion patterns within audit firms impact audit adjustments. Using detailed data on partner promotions in Chinese audit firms, we measure firm‐level promotion speed and promotion flexibility and examine their effects on audit adjustments. We find that auditors in audit firms with faster and more flexible promotion patterns are more likely to make audit adjustments. Additional analyses show that firmwide promotion speed and flexibility are positively associated with the likelihood of both upward and downward adjustments, as well as the magnitude of audit adjustments. Cross‐sectional analyses indicate that the effects of promotion patterns on audit adjustments are more pronounced in larger audit firms, with the effect of promotion speed being stronger among lower ranked auditors facing greater promotion incentives. Additionally, fast and flexible promotion patterns improve audit efficiency. Organizational reform also shapes promotion patterns, as the adoption of the limited liability partnership (LLP) structure is associated with faster partner promotion. Overall, this study provides initial evidence of the effect of promotion patterns on audit outcomes.