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

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Matthew Cobabe

Virginia Tech

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Sarah E. Stein

Virginia Tech

Date Written: March 27, 2019

Abstract

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

Bills, Kenneth L. and Cobabe, Matthew Alan and Pittman, Jeffrey A. and Stein, Sarah E., To Share or Not to Share: The Importance of Peer Firm Similarity to Auditor Choice (March 27, 2019). Available at SSRN: https://ssrn.com/abstract=2994516 or http://dx.doi.org/10.2139/ssrn.2994516

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Matthew Alan Cobabe

Virginia Tech ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Sarah E. Stein (Contact Author)

Virginia Tech ( email )

Blacksburg, VA 24061
United States

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