The Impact of National Office Governance on Audit Quality

Large audit firms operate under decentralized structures that grant autonomy to local offices but introduce moral hazard and knowledge constraint issues. This study investigates whether centralized governance by the national office mitigates these issues. Specifically, we test whether variation in the costs of national office monitoring and knowledge management affects local office audit quality. We proxy for monitoring costs using geographic distance and the introduction of direct airline routes and for knowledge management costs using time zone differences. Using audit engagement data from the eight largest audit firms between 2005 and 2019, we find that lower national office governance costs are associated with a reduced likelihood of client restatements. These benefits are more pronounced for smaller offices and those farther from large offices. Exploiting the staggered introduction of direct airline routes, we show that reduced travel time improves audit quality, especially when national offices face heightened time and resource constraints.