Can non-audit services from shared auditors in the supply chain mitigate the impact of the bullwhip effect on investment efficiency?

Abstract

Amplified demand variability along the supply chain due to the bullwhip effect often leads to a mismatch between actual and planned demand. We study whether this demand distortion leads to less efficient investments for upstream suppliers than for downstream suppliers in the supply chain and whether this effect can be mitigated by non-audit services (NAS) provided by a shared auditor – an auditor that provides audit services to both a supplier and its major customer. Using a dataset of firms in different tiers of the supply chain, we find that suppliers farther upstream in the supply chain tend to have lower investment efficiency. However, upstream suppliers can mitigate this negative impact by purchasing NAS from a shared auditor in the supply chain. We find that the mitigating effect of NAS provided by a shared auditor is driven mainly by tax-related NAS, which is consistent with the notion that tax-related NAS improve investment efficiency by enhancing the design of business processes. Further supporting this interpretation, we show that upstream suppliers with a greater need for improved business processes, such as those with longer operating cycles and less bargaining power over customers, benefit more from purchasing tax-related NAS from a shared auditor. Overall, we identify a novel consequence of the bullwhip effect for the supply chain, namely reduced investment efficiency for upstream suppliers, and demonstrate that NAS provided by a shared auditor in the supply chain can mitigate this negative impact.