Does Distance Matter? An Investigation of Partners Who Audit Distant Clients and the Effects on Audit Quality†

Abstract

We examine how audit partners' geographic proximity to clients affects audit quality. We use hand‐collected data to show that approximately half of audit partners are assigned to clients headquartered more than 100 km away from the partners' home locations. Few of these partners relocate after receiving their assignments and, as a result, more than one‐third of clients are audited by partners who must commute long distances to visit the client in person. We explore this phenomenon by first modeling how distance affects partner‐client matching. We find that partners' geographic proximity to a prospective client is an important matching criterion, but also that trade‐offs are made when other partner characteristics such as industry specialization are more likely to be important. Next, consistent with our prediction, we show that audit quality is lower when partners reside farther from their clients. We corroborate our primary findings by showing that the association between partner distance and audit quality is mitigated when partners have access to direct flights to their clients' headquarters and when clients are geographically dispersed. Our paper should be informative for regulators, practicing auditors, and academics interested in how partner‐client matching affects audit outcomes.

Fool Me Once, Shame on You; Fool Me Twice, Shame on Me: The Long‐Term Impact of Arthur Andersen's Demise on Partners' Audit Quality*

“…We find that approximately 15.4% of clients appoint an audit partner who worked at Andersen during 2001 and/or 2002. The distributions of the other variables closely resemble those in recent studies examining audit partner behavior (Burke et al 2019; Francis et al 2021).…”

“…calendar 2018 to allow nearly three years for misstatements in our sample period to become known, leaving us with 3,079 firm-year observations, which include clients of 1,025 unique audit partners, 153 of whom worked at Andersen at the time of its collapse. 21 For the small profit and (Burke et al 2019;Francis et al 2021).…”

“…16 16 Prior evidence validates that most accounting and finance professionals post their resumes on LinkedIn (Jiang et al 2018; Lee et al 2019; Lourie 2019; Reville et al 2021; Hope et al 2021). Indeed, audit firms routinely encourage partners and employees to maintain a presence on popular professional networking websites (Francis et al 2021). To the extent that disclosure incentives differ systematically between Andersen and non‐Andersen partners, our analysis may admit this form of selection bias.…”

Going Big, Going Small, Strategies for Researching Audit Quality

“…A recent study by Francis, Golshan and Hallman (2022) provides some initial evidence that non-local audits may not be a good idea because they are potentially of lower quality. use the new partner disclosure data in the US to investigate the following question: Does a partner's geographical distance from a client influence audit quality?…”

Shirking from home?: the effects of remote work on overstatement of working hours

“…There are also examples in auditing research which have explored the role of physical distance 3 on audit quality. Francis, Golshan, and Hallman (2021) show that audit partners that have a higher physical distance with clients show lower audit quality compared with clients with lower physical distance. The authors shed some light on these results with explanations that are in line with companies' concerns over remote workers.…”