Why Do Clients Choose Nonlocal Auditors?

Abstract

We examine the client’s decision to engage a nonlocal auditor when close quality options are available. Clients seek nonlocal specialist auditors more often, but nonlocal engagements do not appear motivated by better pricing in distant markets. We show that, controlling for client-auditor distance, choosing a nonlocal auditor is associated with more restatements and litigation, suggesting that clients engage nonlocal auditors to avoid oversight. The effect of this choice on audit quality and client litigation hold in the context of a natural experiment where the cost of monitoring the client is decreased exogenously. Nonlocal engagements are ultimately detrimental to shareholder wealth.