Does Distance Matter? Geographic Distance as a Barrier to Uniform Audit Quality

• In Event: Diversification and Geographic Distance

Abstract

Despite economic incentives for firms to provide uniform audit quality across their practice offices, extant auditing research finds significant within-firm variation. This study investigates one potential reason for auditors’ failure to achieve consistent audit quality: the physical distance between audit offices. Because a significant portion of audit competence depends on tacit knowledge (which is more easily shared in face-to-face interactions), we hypothesize that transferring audit knowledge between geographically dispersed audit offices is costly. Although larger Big 4 offices have higher audit quality on average, we find that smaller offices’ audit quality improves as the physical distance to the nearest large office decreases. This relationship is stronger when the large office is also an industry expert and does not appear to be driven by client characteristics. Our findings contribute to understanding why differential audit quality exists and have implications for practitioners seeking to establish a higher level of audit quality throughout their firms.

Authors

• Matthew James Beck, Michigan State University

• Joshua Gunn, University of Pittsburgh

• Nicholas Jennings Hallman, University of Missouri