Geographic Proximity between Auditor and Client: How Does it Impact Audit Quality?
49 Pages Posted: 11 Jan 2012
Date Written: January 11, 2012
Using a large sample of audit client firms, this paper investigates whether and how the geographic proximity between auditor and client affects audit quality proxied by accrual-based earnings quality. We define an auditor as a local auditor if the auditor’s practicing office is located in the same metropolitan statistical area (MSA) as the client's headquarters and if the geographic distance between the two cities where the auditor’s practicing office and the client’s headquarters are located is within 100 kilometers or they are in the same MSA. As predicted, our empirical results are consistent with local auditors providing higher-quality audit services than non-local auditors. In addition, as predicted, this quality difference is weakened for diversified clients with more operating or geographic segments. The results are robust to a variety of sensitivity checks. Overall, our evidence suggests that informational advantages associated with local audits enable auditors to better constrain management’s biased earnings reporting, with greater advantages for less diversified clients.
Keywords: auditor locality, geographic proximity, audit quality, diversification
JEL Classification: M42
Suggested Citation: Suggested Citation