Geographic Proximity between Auditor and Client: How Does it Impact Audit Quality?

49 Pages Posted: 11 Jan 2012  

Jong-Hag Choi

Seoul National University - College of Business Administration

Jeong-Bon Kim

University of Waterloo

Aini Qiu

Citigroup Japan Inc.

Yoonseok Zang

Singapore Management University - School of Accountancy

Date Written: January 11, 2012

Abstract

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

Choi, Jong-Hag and Kim, Jeong-Bon and Qiu, Aini and Zang, Yoonseok, Geographic Proximity between Auditor and Client: How Does it Impact Audit Quality? (January 11, 2012). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1982959

Jong Choi

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Jeong-Bon Kim

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
1-519-888-4567 (Phone)
1-519-888-7562 (Fax)

Aini Qiu

Citigroup Japan Inc. ( email )

Japan

Yoonseok Zang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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