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

We examine how audit partners' geographic proximity to clients affects quality. use hand-collected data show that approximately half of partners are assigned headquartered more than 100 km away from the home locations. Few these relocate after receiving their assignments and, as a result, one-third audited by who must commute long distances visit client in person. explore this phenomenon first modeling distance partner-client matching. find prospective is an important matching criterion, but also trade-offs made when other partner characteristics such industry specialization likely be important. Next, consistent with our prediction, we quality lower reside farther clients. corroborate primary findings showing association between and mitigated have access direct flights clients' headquarters geographically dispersed. Our paper should informative for regulators, practicing auditors, academics interested outcomes. La est-elle importante? Une enquête sur les associés qui font de l'audit à et effets la qualité Cette étude comment proximité géographique des d'audit avec affecte l'audit. Les auteurs utilisent données recueillies manuellement pour montrer qu'environ moitié sont affectés dont le siège social est situé plus kilomètres leur domicile. Peu ces déménagent après avoir reçu affectation et, par conséquent, d'un tiers audités doivent parcourir longues rendre visite au en personne. explorent ce phénomène modélisant d'abord l'effet l'appariement associé-client. Ils constatent que un potentiel critère d'appariement important, mais aussi compromis faits lorsque d'autres caractéristiques associés, comme spécialisation sectorielle, susceptibles d’être importantes. Ensuite, conformément prédiction, montrent moindre résident loin leurs corroborent principales conclusions montrant l'association entre atténuée ont accès vols directs vers géographiquement dispersés. Cet article devrait être instructif autorités réglementation, auditeurs exercice universitaires s'intéressent manière associé-client résultats Audit standards United States require lead rotate off public company engagements every five years. firms lamented rotation requirement could result being distant clients, expressed concern commutes might worse service (Daugherty al. 2012). Yet, same reluctance closer noting moving can negatively impact life To date, little known about often frequency which relocate, or effects issues archivally using novel set includes Of sample onto new engagements, nearly live where headquartered. Fewer 15% choose travel (one way) The average 1,000 km. Given significant separates many attempt answer two fundamental questions: (i) what role do locations play process? (ii) there quality? begin exploratory analysis partner-to-client process. One reason so matches optimized over criteria, partner's only one. Thus, facilitate analysis, gather on including education, years experience, specialization, leadership positions, gender, workload. Then, relationships, create consists all occurred ex ante. model actual function most different types reveals that, expected, located client's significantly selected audit. However, preference local weaker S&P 500, areas few partners, (iii) industries complex accounting rules, (iv) document characteristics. For example, location less relative rules. empirical finding increases, too does probability misstatement will meet beat analysts' consensus earnings forecasts. Together, results suggest lower-quality earnings. magnitude economically meaningful; holding control variables at mean values, increases 10 500 km, (meeting just beating forecast) 2.0% (6.0%) 2.5% (7.4%) 3.0% (8.6%). rule out several alternative explanations closely related Choi (2012), office associated Because correlated distance, initial plausibly driven offices instead partners. In addition controlling analyses, supplementary tests limit “close” various thresholds (e.g., km) independently study variation distance. evidence suggests statistically independent acknowledge ways nonrandom selection affect interpretation results. matched specialist risky may disproportionally risk rather availability cities instrument exogenous complexity risk. instrumental variable (IV) estimation support findings. cross-sectional test whether (nonstop) mitigate effect A flight makes it easier frequently intuition, shows partially mitigates adverse provide dispersed operations. These contributes streams research. First, contribute nascent stream research matching, until now has relied primarily interviews qualitative 2012; Dodgson 2020). among large publicly available vis-à-vis important—although not deterministic—matching criterion. Moreover, some willing accept they possess characteristics, relevant expertise. Second, developing literature individual Thus far, found limited determinant (Laurion 2017; Aobdia, Siddiqui 2021; Choudhary Gipper Cameran 2021). disclosure names useful market participants, changes behavior (Cunningham 2019; Doxey Burke 2019). contrast prior literature, strong Third, note attribute pairs. This feature distinguishes much partner-specific discussed above why studies failed similar associations care effort committees exercise attempting identify “right” particular engagement, believe directly, interact production audits. predict line inquiry prove fruitful future cast engagement central player process, independence essential maintaining quality.1 Based perceptions longer relationships impair independence, passed section 203 Sarbanes-Oxley Act, requires years, search replacement both expertise capacity replace outgoing partner. report spending substantial time resources managing process (Dodgson 2020; academic gets client, implications exist relies techniques with, surveys of, auditors. (2020) semistructured 20 manage during rotations. According begins discussion firm representatives members committee gauge preferences Depending size personnel involved discussions partner, sector/industry leaders, national specialists, leadership, etc.). request very specific interviewee compared meets requirements looking “purple squirrel” (2020, 99). Partners positions particularly high demand. Some put “emphasis [gender racial] diversity next partner” 2020, 100). Once known, (typically one three) suitable present client. Each committee. committee—often consultation management—then chooses interviewed candidates or, alternatively, communicates none acceptable. latter case, again. Daugherty (2012) interview focus possibility mandatory rotations requiring either distances. make clear neither outcomes ideal. Indeed, survey indicate would serve prestigious move noted “relocation family disruption life” 2012, 109). Another “spouse refused move, rotating distances” 101). responses interesting questions. given auditors express difficulty 2020), sorts practice? Do trade-offs? How expanded beyond office? regional greatly expand option easier. themselves typically prefer distances, even if doing working Considering apparent conflict, clients? When versus (tele)commute? aware any theory inform testable predictions questions, refrain stating formal hypotheses. Instead, 4, conduct series descriptive analyses. goal analyses shed light, questions articulated above, generally sometimes If (tele)commute (2012, 101) “consistently assessed [long commutes] sub-optimal response, leading poorer quality.” asked rate agreement statement: “When required telecommute, declines,” surveyed responded four seven-point Likert scale. sentiments archival economics finance literatures, information asymmetry analysts cover reduces accuracy forecasts (Malloy 2005; O'Brien Tan 2015). Geographic decisions investors (Coval Moskowitz 2001; Ivković Weisbenner 2005) returns corporate acquisitions (Uysal 2008).2 setting, expect far face frictions. because lives away, familiar develop deeper knowledge top management organizational culture. Consistent supposition, recent experimental financial reporting bias detect face-to-face interactions (Bentley 2016). whom occur frequently, better position part managers. nonpartner teams traditionally fieldwork on-site location, opportunities teams. Face-to-face allow fulfill supervisory duties effectively. Junior learn technical skills through senior team, worry reduced interpersonal contact effectiveness on-the-job learning (Westermann Partner incentive field. Brazel (2004) staff work reviewed remotely, focused effective auditing judgment preparing workpapers. sum, speculated detrimental Experimental supports supposition mechanisms manifest 2016; 2004; Westermann knowledge, been no large-scale investigation exists practice. seek fill gap testing following hypothesis, stated form: Hypothesis.Audit Despite directional hypothesis supporting least three reasons unable reject null although PCAOB dictate “responsible its performance” (PCAOB AS 1201.03), “seek assistance appropriate team fulfilling [their] responsibilities” 1201.04). 6% total hours largest six (Gipper relatively small number audits, reasonable question major factor determining quality, regardless view, body emerged wake name disclosures (such tenure expertise) explain Siddiqui, Choudhary, assignment possesses desirable insists experience another city locally. (or characteristic sought committees) produce higher-quality overall becomes ambiguous, exacerbates frictions conjecture. sufficiently confounding exists. presumes 2012), nor proportion assigned, known. Anecdotally, spoke refuse consider nonlocal unwilling relocate. anecdote, combined auditors' own considerable pressure data. rules registered submit Form AP disclose sign opinions issued January 31, 2017 As July 27, cutoff date observations included study, 24,439 unique client-years 10,149 4,007 partners.3 client-years, exclude 3,361 appear Analytics Opinions database. 6,042 missing values Compustat prevent us calculating full sections. 352 client-year population core-based statistical area (CBSA) located. 989 enter because, discuss next, collected wave 2017. remaining summer 2017, manually searched internet online profiles possible, recorded “home location.” names, job title, firm. During went back record collect additional demographic detail 4. final screen, remove 4,292 collection were profile did list was detailed enough used constitute sample, 9,403 3,464 1,833 screens outlined Table 1. due analyst I/B/E/S 6,069 sample). fiscal 2016 2019. (2018 2019).4 fail update moving, measurement error. drawing random 50 paying fee background each Spokeo.com.5 Spokeo.com provides, information, real estate ownership record. able confidently match 42 Spokeo.com. early 2019, owned worth $850,000 within value confidence correctly identified residences. eight records initially moved 2019 Upon rechecking profile, he had updated his location. seven confirmed directly firms. commute. 2020 (see 3), first-year 2018 observe before begin. 1), 1,116 involving 812 2 presents chose 181 (22%) 177 454 (56%) classify having “relocated” Approximately 1% relocated researched again 2020. On hand, 10% (14%) (more statistics 2. (i.e., 44%) live. while seem prompt majority telecommute. sense decide physically commute, Figure 1 displays map arrows point clients.6 figure demonstrates, east coast west coast, vice versa. Notes: starts points 2, optimize c