Auditor-Client Distance: Determinants and Implications for Audit Quality

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 2: Joint Audits and Market Structure

Abstract

The finance geography literature has provided evidence on the informational advantage possessed by local investors, analysts, investment banks, mutual fund managers, and market makers. The plausible explanations for the information advantage of local stakeholders are lower cost of information and better access to information. Geographical advantages may apply in the audit market as well. This paper investigates factors that determine a firm’s choice of a local or non-local auditor, and the consequence of auditor-client distance on audit quality by using the likelihood of financial restatements. The results suggest that the availability of local Big 4 auditors and auditors with industry specialization lowers the likelihood of firms hiring non-local auditors. Loss firms, firms receiving going concern audit reports, firms with lower profitability, and firms with internal control problems are more likely to engage non-local auditors. Collectively, the evidence suggests that firms with high audit risk are more likely to hire non-local auditors. Lastly, I observe that non-local auditors’ fees are higher than local auditors’ fees. This suggests that firms fail to lower audit fees by hiring non-local auditors. One possible explanation is that non-local auditors charge higher fees to compensate for risks arising from information asymmetry between a non-local auditor and the client. I further find that financial statements audited by local auditors are less likely to be restated. The plausible explanation is that local auditors have information advantage that comes from lower cost of information and better access to information.

Author

• Wasinee Thammasiri, University of the Thai Chamber of Commerce