Public Company Audits and City-Specific Labor Characteristics

58 Pages Posted: 18 Sep 2016 Last revised: 22 Jul 2017

See all articles by Matthew Beck

Matthew Beck

Michigan State University; Michigan State University, The Eli Broad College of Business and The Eli Broad Graduate School of Management, Students

Jere R. Francis

Maastricht University

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business

Date Written: September 13, 2016

Abstract

Prior research emphasizes the centrality of audit offices in understanding auditing practices, and documents significant inter-office variation in audit outcomes based on industry expertise and office size. Our study examines how two city-specific labor characteristics also affect audit offices and local audit markets: the city’s average educational attainment, and the number of accountants in a city, which proxy for a city’s human capital. Our argument draws on the urban economics literature and predicts that the level of human capital in a city is positively associated with an audit office’s ability to conduct high-quality audits. As expected, there is a positive association between audit quality (quality of audited earnings and accuracy of going concern reports) and average education level in the city in which the lead engagement office is located. This association is generally significant for both Big 4 and non-Big 4 offices, but is relatively stronger for non-Big 4 firms that are more tied to local labor markets. A company is also more likely to choose a non-Big 4 auditor in cities with higher educational levels and relatively more accountants, and there is evidence of higher non-Big 4 audit fees as a city’s education level increases. Collectively, these results suggest that local labor characteristics affect audit offices, audit quality, and the ability of non-Big 4 auditors to compete with Big 4 auditors in the audits of public companies.

Keywords: auditor choice, audit quality, earnings quality, audit fees

JEL Classification: J44, M41, M42, R23

Suggested Citation

Beck, Matthew and Francis, Jere R. and Gunn, Joshua L., Public Company Audits and City-Specific Labor Characteristics (September 13, 2016). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2838458 or http://dx.doi.org/10.2139/ssrn.2838458

Matthew Beck

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Michigan State University, The Eli Broad College of Business and The Eli Broad Graduate School of Management, Students ( email )

East Lansing, MI
United States

Jere R. Francis (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Joshua L. Gunn

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

Pittsburgh, PA 15260
United States

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