Financial Reporting Quality and Auditor Locality Contagion

Posted: 3 Feb 2017

See all articles by Gregory W. Martin

Gregory W. Martin

University of North Carolina (UNC) at Charlotte - Department of Accounting

Wayne B. Thomas

University of Oklahoma

Jamie Diaz

College of William and Mary

Date Written: February 2, 2017

Abstract

Research in information economics seeks to understand how the actions of one individual affect the decisions of related individuals. We examine this issue in the context of information contagion between audit offices in the same locality. Specifically, we investigate whether contagion among Big N audit offices in the same metropolitan statistical area (MSA) causes their client firms’ financial reporting quality to correlate. We document a relation between overstatement of earnings for one firm (as evidenced by a subsequent restatement) and higher abnormal accruals for another firm in that same year, where both firms’ auditors are located in the same MSA. The correlation in reporting quality is consistent with contagion in practices between auditors. We also find evidence that auditor competition is one channel through which information contagion occurs. The between-audit office contagion we document is incremental to within-audit office contagion documented by prior research. Our evidence is important in understanding additional factors related to the quality of auditing and financial reporting and thus should be relevant to audit committees, regulators attempting to improve audit quality, and stakeholders in general.

Keywords: Financial Reporting Quality, Audit Quality, Restatements, Contagion

JEL Classification: M41, M42

Suggested Citation

Martin, Gregory W. and Thomas, Wayne B. and Diaz, Jamie, Financial Reporting Quality and Auditor Locality Contagion (February 2, 2017). Auditing: A Journal of Practice & Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2910537

Gregory W. Martin (Contact Author)

University of North Carolina (UNC) at Charlotte - Department of Accounting ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

Jamie Diaz

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States
7572212932 (Phone)

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