Audit Firm Industry Sector Leader Geographic Location and Its Association With Audit Fees

Abstract

This study tests whether an association exists between the geographic location of industry sector leaders in an auditing firm and differences in audit pricing for that same auditing firm’s industry clients. Using organizational learning theory and human capital theory, we predict that the industry-specific human capital of the audit partner in charge of an industry practice serves as a silo for this knowledge and provides an opportunity to charge a fee premium to their local clients. Using a hand collected dataset of partners overseeing industry-specific audit practices on audit firm websites, we provide evidence that a positive association exists between industry sector leaders’ office locations and audit fees for same-industry clients in that city. Building on prior research on the effect of individual audit partners and general human capital on audit quality, this study provides additional insight into the human capital of audit firm industry sector leaders and the dynamics of audit market competition.

Keywords: Audit Firm Structure; Audit Pricing; Human Capital

JEL Classification: J24; M12; M42