Why Hire a Big 4 Auditor 500 Miles Away?

Abstract

This paper investigates why a firm would hire an auditor far away from its corporate headquarter. Using a sample from the Audit Analytics database, we show that 75% of the firms hire a Big 4 auditor less than 33 miles away from their headquarters, and the median distance is only 14 miles. For the majority of firms, the driving time from a client’s headquarter to its auditor’s office is less than 45 minutes, and the median driving time is only 21 minutes. However, our results also show that some firms are willing to go the extra mile and hire a remote auditor. About 10% of the sample hire a Big 4 auditor more than 150 miles away, and some firms even hire an auditor more than 500 miles away. We test a few possible explanations, including earnings management hypothesis, competitive audit fee hypothesis, diversified operating location hypothesis, etc. Our analysis shows that firms having the tendency to manage earnings are more likely to hire a remote auditor. Specifically, we find that firms that are more likely to report small positive earnings, more likely to have financial restatements, and more likely to report higher expected discretionary accruals, tend to hire remote auditors. We also find that firms with diversified geographic segments, not operating segments, are more likely to hire remote auditors. Finally, we show that competitive audit pricing affects firms’ office choice, but only within certain distance. Beyond certain limit, there is no difference in audit fees offered by local and non-local auditors.

Keywords: Geographic Distance, Auditor Choice, Office-Level Analysis, Corporate Governance, Restatement