Audit Firms as Networks of Offices
Posted: 4 Aug 2017
Date Written: July 19, 2017
Prior audit research suggests that most, if not all, audit quality can be explained at the office-level. However, the question remains of whether office-level audit quality is contingent on how individual offices relate to the firm as a whole. Motivated by theories of knowledge management, organizational learning and networks, we posit that individual offices are connected to their audit network through partner knowledge sharing and oversight, which impacts office-level audit quality. We interview Big 4 audit partners and learn that knowledge sharing between partners in different offices is common and intended to aid in the provision of audit services. Using network connectedness to proxy for knowledge sharing and oversight between offices of the same firm, we document that more connected offices are associated with fewer client restatements and lower discretionary accruals. We additionally find that network effects are magnified when accounting treatments are more complex and require greater auditor judgement.
Keywords: Intracorporate Networks, Network Connectedness, Audit Quality
JEL Classification: M41, M42
Suggested Citation: Suggested Citation