Auditor Locality, Audit Quality and Audit Pricing

• Main Authors: Choi, Jong-Hag, Kim, Jeong-Bon, Qiu, Aini, ZANG, Yoonseok
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2007
• Subjects: Accounting; Business Law, Public Responsibility, and Ethics; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/88
• Institution: Singapore Management University

Using a large sample of U.S. audit client firms over the 2001-2004 period, this paper investigates whether and how the locality of auditor or the geographic proximity between auditors and clients affects audit quality and audit pricing. We use the magnitude of abnormal accruals as a proxy for audit quality. To capture the effect of auditor locality, we differentiate local auditors from non-local auditors based on: (1) whether or not the practicing office of an audit engagement is located in the same state where the client is headquartered; and (2) the actual geographic distance between two cities where the auditor’s practicing office and the client’s headquarter are located. Our empirical results reveal the following: First, clients of local auditors report significantly lower abnormal accruals, compared with clients of non-local auditors, suggesting that local auditors provide higher-quality audits. Second, the fees paid to local auditors are, overall, not significantly different from those paid to non-local auditors. Further analyses show that local Big 4 auditors charge lower audit fees than non-local Big 4 auditors. Overall, our results indicate that local audits enhance audit quality without imposing additional costs on clients in the same locale.