Common Auditors and Trade Credit

• In Event: Auditing and Auditor Characteristics

Abstract

This study investigates the role of a common auditor in the level of trade credit in a supplier-customer relationship. We hypothesize that having a common auditor reduces transaction costs for suppliers in the customer-supplier relationship by reducing information asymmetry and creating a level of trust between the supplier and customer. We find that when customers and suppliers have the same audit firm, customers are able to obtain more trade credit. Further, cross-sectional analyses suggest that when customers and suppliers are in the same industry, the positive effect of the common auditor on customer trade credits is moderated. We also report that when customers have high bargaining power, or when the supplier-customer relationship begins or ends, a common auditor has a stronger positive impact on the trade credit. Our findings expand our understanding of the real effects of auditing; i.e., that auditors have an economic impact on their clients beyond effects for financial reporting.

Authors

• JiangBo HuangFu HuangFu, Florida Atlantic University - Boca

• Scott E Seavey, Florida Atlantic University

• Hanbing Xing, Florida Atlantic University