To Share or Not to Share: The Importance of Peer Firm Similarity to Auditor Choice
71 Pages Posted: 30 Jun 2017 Last revised: 29 Mar 2019
Date Written: March 27, 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. Importantly, we rely on survey evidence on audit partner perceptions in developing the intuition underlying the predictions to help deepen our understanding of setting and to validate the inferences drawn from our archival analysis. 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 peer firms deviate from this optimal auditor choice in settings with greater perceived costs of information leakage to rival firms as well as embedded auditor-client relationships in which the auditor retains deep client knowledge. Collectively, we provide large-sample archival 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 forego the benefits of selecting a more knowledgeable auditor. These findings imply that negative societal implications arise in these settings where clients deviate from seeking auditor expertise.
Keywords: auditor choice, product similarity, auditor knowledge, proprietary costs
JEL Classification: M4, M42
Suggested Citation: Suggested Citation