Does auditor–client geographic proximity matter? New evidence from an emerging market

Purpose - The purpose of this study is to assess the implications of auditor–client geographic proximity on audit fees, audit report lag and audit quality in the context of an emerging economy, Bangladesh. Design/methodology/approach - The auditor–client proximity is gauged in kilometers and travel time, consistent with prior research to assess its association with audit fees, audit report lag and audit quality. Analyzing a data set of 469 firm-year observations from 2018 to 2021 through panel regression, the results are then interpreted in accordance with cluster theory and transaction cost theory. Findings - The findings affirm a significant positive association of auditor–client proximity with audit fees and audit report lag. Distant auditors charge lower fees and maintain the timeliness of audit reports to capture and retain distant clients. In addition, the study uncovers a negative association between proximity and audit quality. Geographic proximity can create a familiarity threat between the management team of the client and the local auditor, which can decrease audit quality. These associations are more pronounced in low-risk clients than the high-risk ones. Practical implications - These findings underscore the intricate interplay between geographic proximity, communication hurdles and their effects on diverse facets of the audit process that both auditor and client should consider in future audit engagement. Originality/value - This research criticizes the existing literature linking auditor–client proximity with audit quality, fees and report lags and provides novel insight from an emerging economy context.