Out of Sight, Out of Mind: Does Audit Partner Proximity to Clients Matter?

49 Pages Posted: 27 Sep 2017

See all articles by Jere R. Francis

Jere R. Francis

University of Missouri at Columbia

Nargess Golshan

University of Missouri

Nicholas Hallman

University of Texas at Austin

Date Written: September 25, 2017

Abstract

We examine if the geographic proximity of audit partners to their clients is associated with audit quality. We use newly mandated PCAOB disclosures of engagement partners and find that more than one quarter of clients have non-local partners, which are defined as partners with home locations at least 100 kilometers from their clients’ headquarters. We build on an extensive literature examining the effects of proximity between economic agents to predict that audit quality is lower when a lead engagement partner is located farther from the client. Our findings are consistent with this prediction. Clients’ audited earnings are of lower quality when the lead engagement partner is non-local. Inconsistent with prior research, which did not have the benefit of partner-level data, we find that there is no association between audit office proximity and the quality of clients’ audited earnings, once partner proximity is held constant. Our findings are consistent across several alternative measures of audit quality and robust to a battery of sensitivity tests, including model specifications designed to rule out potential alternative explanations. In cross-sectional analyses, we show that the adverse effect of partner distance is less severe for Big 4 partners, and for audit partners with easy access to a direct flight to their clients’ headquarters. Finally, we find that extended audit firm tenure increases the odds that a client will have a non-local partner. We suggest this association is caused at least in part by mandatory audit partner rotation, which, combined with our primary findings, point to a potential unintended negative consequence of mandatory rotation policies.

Keywords: Audit Partners, Geographic Proximity, Audit Quality

JEL Classification: M42

Suggested Citation

Francis, Jere R. and Golshan, Nargess and Hallman, Nicholas, Out of Sight, Out of Mind: Does Audit Partner Proximity to Clients Matter? (September 25, 2017). Available at SSRN: https://ssrn.com/abstract=3042791 or http://dx.doi.org/10.2139/ssrn.3042791

Jere R. Francis

University of Missouri at Columbia ( email )

303 Cornell Hall
School of Accountancy
Columbia, MO 65211
United States
573-882-5156 (Phone)
573-882-2437 (Fax)

Nargess Golshan

University of Missouri ( email )

328 Cornell Hall
University of Missouri
Columbia, MO Columbia 65211
United States
5738841678 (Phone)

Nicholas Hallman (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

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