To Share or Not to Share: The Importance of Peer Firm Similarity to Auditor Choice
70 Pages Posted: 30 Jun 2017 Last revised: 11 Aug 2019
Date Written: July 30, 2019
A firm’s decision on whether to choose the same auditor as a close competitor reflects a trade-off between exercising caution to protect its proprietary information and pursuing the benefits of auditor knowledge derived from providing services to comparable clients. We conduct a survey of experienced audit partners whose responses confirm that clients weigh these competing incentives when selecting an external auditor. Building on this survey evidence from practice, we analyze the larger impact of this phenomenon empirically through archival analyses. Using a pairwise similarity measure based on descriptions from regulatory filings, we find that, on average, peer firms are more likely to engage the same auditor when their product offerings are more similar. In instances when the focal firm shares the same auditor with more similar peer firms, the focal firm benefits from enhanced audit quality while also paying lower audit fees. Despite these benefits, we find that peer firms are less likely to share auditors with rivals in settings with greater perceived costs of information leakage as well as embedded auditor-client relationships in which the auditor retains deep client knowledge. Collectively, we provide evidence that, although the upside stemming from auditor knowledge, on average, dominates the downside of greater vulnerability to information leakage, certain proprietary cost concerns motivate firms to deviate from seeking auditor expertise.
Keywords: auditor choice, product similarity, auditor knowledge, proprietary costs
JEL Classification: M4, M42
Suggested Citation: Suggested Citation