The Importance of Proximity to the Audit Firm’s National Office to Practice Office Growth and Audit Quality
Posted: 28 Feb 2021 Last revised: 10 May 2021
Date Written: May 10, 2021
We examine the role that an audit firm’s national office plays in shaping its practice offices’ economic outcomes. Given that national offices provide superior support, monitoring, and advising to physically closer offices, we expect an increase in proximity to improve practice offices’ capacity and expertise. Exploiting the introduction of new airline routes that results in a decrease in travel time between national and practice offices as an exogenous shock, we find that treated offices enjoy significant growth in their market share and their clients exhibit a significant improvement in financial reporting quality relative to pre-treatment and untreated offices. Cross-sectional tests reveal that these effects are magnified in non-Big 4 and remote Big 4 offices, offices that are more distant from the nearest SEC office, and offices that experience large travel time reductions. Moreover, we show that, after becoming more proximate to the national office, treated offices are more likely to accept inherently riskier engagements, implying that growth among treated offices is partly driven by an increase in treated offices’ ability to take on riskier engagements given their improved expertise. Collectively, these results shed light on the importance of auditors’ national offices to their practice offices.
Keywords: Internal Governance; Proximity; Office Growth; Client Selection; Audit Quality
JEL Classification: M40; M42; D20; D22
Suggested Citation: Suggested Citation