Financial comment letters, geographic proximity and audit quality

Abstract

ABSTRACT This paper studies the role of the financial comment letter (CL) in auditing by investigating how CLs affect auditors’ performance. We find that the CL can stimulate auditors to improve audit quality and that the result mainly derives from the individual auditor level. Considering geographic proximity, our results show that the positive influence of CLs on audit quality is more pronounced when auditors are located closer to their clients and regulators. Additional analyses indicate that individual auditors’ independence and industry specialization can strengthen the relationship between commented auditors and audit quality. Our results suggest that CLs can motivate better audit outcomes and that geographic proximity can further influence the effect of CLs on audit quality.