Why Do Clients Choose Nonlocal Auditors?

55 Pages Posted: 6 Nov 2017

See all articles by Nathan Lundstrom

Nathan Lundstrom

University of Missouri - School of Accountancy

Adam S. Yore

University of Missouri at Columbia - Department of Finance

Date Written: November 3, 2017

Abstract

We examine the client’s decision to engage a nonlocal auditor when close quality options are available. Clients seek nonlocal specialist auditors more often, but nonlocal engagements do not appear motivated by better pricing in distant markets. We show that, controlling for client-auditor distance, choosing a nonlocal auditor is associated with more restatements and litigation, suggesting that clients engage nonlocal auditors to avoid oversight. The effect of this choice on audit quality and client litigation hold in the context of a natural experiment where the cost of monitoring the client is decreased exogenously. Nonlocal engagements are ultimately detrimental to shareholder wealth.

Keywords: Audit Quality, Nonlocal, Restatements, Monitoring, Auditor Choice, Litigation, Audit Fees, Specialist Auditors

JEL Classification: G32, G34, M41, M42

Suggested Citation

Lundstrom, Nathan and Yore, Adam S., Why Do Clients Choose Nonlocal Auditors? (November 3, 2017). Available at SSRN: https://ssrn.com/abstract=3065175 or http://dx.doi.org/10.2139/ssrn.3065175

Nathan Lundstrom

University of Missouri - School of Accountancy ( email )

MO
United States

Adam S. Yore (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

403 Cornell Hall
Columbia, MO 65211
United States
573-884-1446 (Phone)

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