Client-Auditor Supply Chain Relationships, Audit Quality, and Audit Pricing

Abstract:     
We investigate the effect of auditors’ supply chain expertise at the city-level on supplier companies’ audit quality and audit pricing. We find that auditors’ supply chain expertise at the city-level is associated with higher audit quality and lower audit fees for supplier companies, compared to companies employing auditors with no supply chain expertise. Additional analyses show such effects are stronger for supplier companies when the sales made to their major customers comprise a greater proportion of their total revenue, and when the revenue cycle in the audit engagement for the supplier companies is more important. Supplemental analyses on the effect of changes in auditors’ supply chain expertise on both audit quality and audit fees for supplier companies reinforce the main results. We obtain these results while controlling for the usual determinants of audit quality and fees, along with auditors’ industry specialization at the national and city-levels.

Number of Pages in PDF File: 46

Keywords: Supply chain relationships, audit firm selection, audit quality, audit pricing

JEL Classification: M41, L14, L22

working papers series