Geographic Distance and Municipal Internal Control Reporting

Abstract

Prior research has investigated various factors affecting auditor performance when examining the internal control system of an entity. However, one factor that remains relatively unexplored is the geographic distance between auditors and their municipal clients. This study explores whether geographic distance, measured as the driving distance between U.S. municipalities and their external auditors, plays a role in the likelihood and severity of internal control weaknesses identified during Circular A-133 audits. We find evidence of a positive association between the disclosure of internal control exceptions and driving distance, suggesting that audit rigor is greater for geographically distant clients. Overall, our findings contribute to our understanding of the factors affecting auditor independence and performance in the municipal audit market.

Keywords: Auditor Independence, Auditor Performance, Circular A-133 Audits, Federal Programs, Geographic Distance, Internal Controls, Municipal Audits

JEL Classification: M40, M41, M42, M48, M49