The geography of US auditors: information quality and monitoring costs by local versus non-local auditors

Abstract

Borrowing from recent finance research that describes geographic distance as a determinant of information asymmetry and performance, we examine the relation between audit quality and auditor-client proximity. After controlling for monitoring costs (audit fees) and client firms' selection of auditors, we find that accruals quality (a common proxy for audit performance) improves with auditor proximity. The findings indicate that auditors have information advantage that dissipates with geographic distance (i. e., "soft'' information in Berger et al. in J Financ Econ 76(2): 237-269, 2005; Coval and Moskowitz in J Polit Econ 109(4): 811-841, 2001; Petersen and Rajan in J Financ 57(6): 2533-2570, 2002), suggesting that that investors, analysts, and regulators should pay additional attention to information risk for firms audited by non-local auditors.