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

60 Pages Posted: 14 Jan 2012 Last revised: 15 Dec 2014

Karla M. Johnstone

University of Wisconsin - Madison - Department of Accounting and Information Systems

Chan Li

University of Pittsburgh - Katz Graduate School of Business

Shuqing Luo

National University of Singapore

Date Written: July 13, 2014

Abstract

We investigate the association between auditors’ supply chain knowledge and companies’ audit quality and audit pricing. Auditor supply chain knowledge is a specialized understanding of information and processes regarding accounting and auditing issues that relates to both a supplier and its major customer, regardless of industry commonalities, that is particularly useful for understanding complexities associated with the revenue cycle. We find that auditors’ supply chain knowledge at the city level is associated with higher audit quality and lower audit fees, compared to companies employing auditors with supply chain knowledge at the national level or employing auditors without supply chain knowledge. Such effects are stronger for supplier companies that derive a high proportion of revenue from their major customers, and when the revenue cycle for the supplier companies is more important. We obtain these results while controlling for the usual determinants of audit quality and fees, along with auditors’ industry specialization.

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

JEL Classification: M41, L14, L22

Suggested Citation

Johnstone, Karla M. and Li, Chan and Luo, Shuqing, Client-Auditor Supply Chain Relationships, Audit Quality, and Audit Pricing (July 13, 2014). Auditing: A Journal of Practice & Theory, Vol. 33, No. 4, 2014. Available at SSRN: https://ssrn.com/abstract=1984897 or http://dx.doi.org/10.2139/ssrn.1984897

Karla M. Johnstone (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

Chan Li

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Shuqing Luo

National University of Singapore ( email )

BIZ1, #07-20
15 Kent Ridge Drive, NUS Business School
Singapore, 119245
Singapore
65-65167435 (Phone)

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