The Geography of U.S. Auditors
46 Pages Posted: 5 Apr 2007 Last revised: 4 Dec 2008
Date Written: November 30, 2008
Recent research suggests that geographic distance is associated with information asymmetry and performance, but it is not clear why this is so. In this study, we examine the effects of geographic distance on monitoring quality in the context of the U.S. audit market. Auditors operate under regulations requiring them to maintain a specified standard of monitoring quality for all clients. They are also compensated for their efforts and for their out-of-pocket monitoring costs. Thus, using this unique setting allows us to control for monitoring efforts and costs and to focus on differential information sets. We find that earnings quality-a common proxy for monitoring quality in auditing-improves with auditor proximity after controlling for monitoring costs (audit fees) and client firms' selection of auditors. We attribute this distance-related information advantage to the availability of "soft" information (Berger et al. 2005, Coval and Moskowitz 2001, Petersen and Rajan 2002).
Keywords: Audit Quality, Information Asymmetry, Geography, Audit Fees
JEL Classification: M49, D82, M41, M43
Suggested Citation: Suggested Citation