Financial statement, geographic proximity, and readability footnotes: The moderating effect of the audit fee

Abstract

The paper aims to investigate the relationship between geographic proximity and the readability of financial statement footnotes, which are important sources of information for stakeholders before making decisions about the firm. Our study focuses on examining the impact of distance and audit fees on the dynamics of auditor-client relationships when it comes to generating or evaluating complex financial statement footnotes. The sample for this study consists of 1,117 firm-year observations from firms listed on the Indonesia Stock Exchange (IDX) from 2018-2020. We employ fixed-effect regression and selection bias testing to ensure the robustness of the results. The authors find that geographic proximity between auditors and clients has an impact on the readability of financial statement footnotes, particularly when the distance between the client and auditor is closer, which may make it more challenging to read financial statement footnotes. Additionally, the interaction between audit fees and geographic proximity can make it easier to read financial statement footnotes. Our findings suggest that closer geographic proximity does not provide information advantages regarding hard-to-read financial statement footnotes, and these results are robust to several endogeneity and robustness tests. Our paper contributes to filling the gap between the auditor-client relationship in hard-to-read financial statement footnotes, which are measured by geographic proximity and audit fees, and how auditors and clients can work best in auditing.