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

See all articles by Keval Amin

Keval Amin

Stony Brook University

Jeffrey Pittman

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

Zhifeng Yang

Stony Brook University

Haoran Zhu

The University of Hong Kong - Faculty of Business and Economics

Date Written: May 10, 2021

Abstract

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

Amin, Keval and Pittman, Jeffrey A. and Yang, Zhifeng and Zhu, Haoran, The Importance of Proximity to the Audit Firm’s National Office to Practice Office Growth and Audit Quality (May 10, 2021). Available at SSRN: https://ssrn.com/abstract=3760226

Keval Amin

Stony Brook University ( email )

John S. Toll Drive
Stony Brook, NY 11794
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)

Zhifeng Yang (Contact Author)

Stony Brook University ( email )

Health Science Center
Level 3, Room 043
Stony Brook, NY 11794-8322
United States

Haoran Zhu

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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