Publication Type

Journal Article

Publication Date

5-2012

Abstract

Using a large sample of audit client firms, this paper investigates whether and how the geographic proximity between auditor and client affects audit quality proxied by accrual-based earnings quality. We define an auditor as a local auditor (1) if the auditor’s practicing office is located in the same metropolitan statistical area (MSA) as the client's headquarters and (2) if the geographic distance between the two cities where the auditor’s practicing office and the client’s headquarters are located is within 100 kilometers or they are in the same MSA. As predicted, our empirical results are consistent with local auditors providing higher-quality audit services than non-local auditors. In addition, as predicted, this quality difference is weakened for diversified clients with more operating or geographic segments. The results are robust to a variety of sensitivity checks. Overall, our evidence suggests that informational advantages associated with local audits enable auditors to better constrain management’s biased earnings reporting, with greater advantages for less diversified clients.

Keywords

Auditor locality, geographic proximity, audit quality, diversification.

Discipline

Accounting | Business Law, Public Responsibility, and Ethics | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Auditing: A Journal of Practice and Theory

Volume

31

Issue

2

First Page

43

Last Page

72

ISSN

0278-0380

Identifier

10.2308/ajpt-10241

Publisher

American Accounting Association