Auditor-Client Geographic Proximity and Earnings Announcement Timeliness

• In Event: Non-GAAP Earnings and Earnings Forecasts

Abstract

Changes in the regulatory environment (i.e. the Sarbanes-Oxley Act of 2002 and recent auditing standards issued by the Public Company Accounting Oversight Board) have put a significant burden on a company’s financial reporting and its audit. At the same time, timeliness of earnings information continues to be highly valued by investors and regulators. This paper examines how the geographic proximity between auditor and client (i.e. auditor locality) affects the timeliness of earnings announcements. We find that earnings announcements are more timely for companies using local auditors. In addition, the effect of auditor locality on the timeliness of earnings is stronger for companies in a less transparent information environment, weaker for companies with greater accounting and audit complexity, and weaker for companies using larger audit offices. Our results are robust after controlling for the potential self-selection bias associated with clients’ choice of local versus non-local auditors as well as a comprehensive list of controls to ensure that auditor locality is not capturing the effects of other characteristics of clients and auditors.

Authors

• Bei Dong, University of South Florida

• Le Xu, University of New Hampshire