The Geography of U.S. Auditors

46 Pages Posted: 5 Apr 2007 Last revised: 4 Dec 2008

Kevan L. Jensen

University of Oklahoma - John T. Steed School of Accounting

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Han Yi

Korea University

Date Written: November 30, 2008

Abstract

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

Jensen, Kevan L. and Kim, Jin-Mo and Yi, Han, The Geography of U.S. Auditors (November 30, 2008). Available at SSRN: https://ssrn.com/abstract=956908 or http://dx.doi.org/10.2139/ssrn.956908

Kevan L. Jensen (Contact Author)

University of Oklahoma - John T. Steed School of Accounting ( email )

307 West Brooks
Norman, OK 73019-4004
United States

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

Han Yi

Korea University ( email )

Hyundai Motor Hall 502
Korea University Business School
Seoul, 136-701
Korea
+82-2-3290-2629 (Phone)

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