The Impact of National Office Governance on Audit Quality

We investigate whether national office governance is associated with audit quality provided by local audit offices. We proxy for national office governance using two measures of geographical proximity, distance and frequent, direct airline routes between a practice office and the national office of the firm, where the latter introduces exogenous variation. We predict and find closer proximity strengthens national office governance through more monitoring and knowledge transfer, resulting in better audit quality, captured by lower propensity of restatements. Cross-sectional analyses confirm that the relation varies with national office’s sensitivity to costs. Finally, we find that smaller audit firms benefit less from national office governance, consistent with theory that suggests smaller partnership structures have less moral hazard costs and less knowledge transfer benefits from national office governance. Collectively, our results help to explain one avenue that develops audit quality within audit firms.