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Public Company Audits and City‐Specific Labor Characteristics

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  • Matthew J. Beck
  • Jere R. Francis
  • Joshua L. Gunn

Abstract

Prior research emphasizes the centrality of audit offices in understanding auditing practices, and documents significant interoffice variation in audit outcomes based on industry expertise and office size. Our study examines how two city‐specific labor characteristics also affect audit offices and local audit markets: the city's average educational attainment, and the number of accountants in a city, which proxy for a city's human capital. Our argument draws on the urban economics literature and predicts that the level of human capital in a city is positively associated with an audit office's ability to conduct high‐quality audits. As expected, there is a positive association between audit quality (quality of audited earnings and accuracy of going‐concern reports) and average education level in the city in which the lead engagement office is located. This association is generally significant for both Big 4 and non‐Big 4 offices, but is relatively stronger for non‐Big 4 firms that are more tied to local labor markets. A company is also more likely to choose a non‐Big 4 auditor in cities with higher educational levels and relatively more accountants, and there is evidence of higher non‐Big 4 audit fees as a city's education level increases. Collectively, these results suggest that local labor characteristics affect audit offices, audit quality, and the ability of non‐Big 4 auditors to compete with Big 4 auditors in the audits of public companies. Les études antérieures sont axées sur la centralité des bureaux d'audit dans la compréhension des méthodes d'audit et font état, preuves à l'appui, de variations importantes des résultats de l'audit entre les bureaux, selon les compétences sectorielles et la taille des bureaux. Les auteurs se penchent ici sur la façon dont deux caractéristiques de la main‐d’œuvre propres à la ville influent également sur les bureaux d'audit et les marchés d'audit régionaux : le niveau de scolarité moyen et l'effectif comptable de la ville, indicateurs servant de variables de substitution au capital humain de la ville. Les auteurs fondent leur argumentation sur la documentation en économie urbaine et posent l'hypothèse selon laquelle le niveau de capital humain d'une ville serait en relation positive avec la capacité d'un bureau d'audit de mener des audits de qualité supérieure. Leur analyse confirme l'existence d'un lien positif entre la qualité de l'audit (qualité des résultats audités et exactitude des rapports sur la continuité de l'exploitation) et le niveau de scolarité moyen de la ville où se trouve le bureau responsable de la mission. Ce lien est généralement significatif tant pour les bureaux des Quatre Grands cabinets que pour les bureaux des cabinets n'appartenant pas à ce groupe, mais il est relativement plus marqué dans le cas des cabinets ne faisant pas partie des Quatre Grands qui sont liés de plus près aux marchés du travail régionaux. Une société est également davantage susceptible de choisir un auditeur n'appartenant pas aux Quatre Grands dans les villes où le niveau de scolarité est plus élevé et où l'effectif comptable est relativement plus grand, et certaines données révèlent que les honoraires d'audit des cabinets n'appartenant pas aux Quatre Grands augmentent avec la hausse du niveau de scolarité d'une ville. Dans leur ensemble, ces résultats semblent indiquer que les caractéristiques de la main‐d’œuvre régionale influent sur les bureaux d'audit, sur la qualité de l'audit et sur la capacité des auditeurs n'appartenant pas aux Quatre Grands de rivaliser avec les auditeurs des Quatre Grands dans les audits des sociétés cotées.

Suggested Citation

  • Matthew J. Beck & Jere R. Francis & Joshua L. Gunn, 2018. "Public Company Audits and City‐Specific Labor Characteristics," Contemporary Accounting Research, John Wiley & Sons, vol. 35(1), pages 394-433, March.
  • Handle: RePEc:wly:coacre:v:35:y:2018:i:1:p:394-433
    DOI: 10.1111/1911-3846.12344
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    Cited by:

    1. Kasper Regenburg & Morten Nicklas Bigler Seitz, 2021. "Criminals, bankruptcy, and cost of debt," Review of Accounting Studies, Springer, vol. 26(3), pages 1004-1045, September.
    2. Francis, Jere R., 2023. "Going big, going small: A perspective on strategies for researching audit quality," The British Accounting Review, Elsevier, vol. 55(2).
    3. Zhang, Yiling & Wei, Lang, 2023. "Does regional audit market competition influence audit pricing? Evidence based on the spatial distribution of the audit market," Finance Research Letters, Elsevier, vol. 58(PC).
    4. John M. Barrios, 2022. "Occupational Licensing and Accountant Quality: Evidence from the 150‐Hour Rule," Journal of Accounting Research, Wiley Blackwell, vol. 60(1), pages 3-43, March.
    5. Bills, Kenneth L. & Cobabe, Matthew & Pittman, Jeffrey & Stein, Sarah E., 2020. "To share or not to share: The importance of peer firm similarity to auditor choice," Accounting, Organizations and Society, Elsevier, vol. 83(C).
    6. Anastassia Fedyk & James Hodson & Natalya Khimich & Tatiana Fedyk, 2022. "Is artificial intelligence improving the audit process?," Review of Accounting Studies, Springer, vol. 27(3), pages 938-985, September.
    7. AYOUB, Maysam, 2023. "European evidence on the effects of audit office changes on clients' financial reporting quality," Working Papers 2023007, University of Antwerp, Faculty of Business and Economics.
    8. Yi Si & Chongwu Xia, 2023. "The Effect of Human Capital on Stock Price Crash Risk," Journal of Business Ethics, Springer, vol. 187(3), pages 589-609, October.
    9. Beck, Matthew J. & Gunn, Joshua L. & Hallman, Nicholas, 2019. "The geographic decentralization of audit firms and audit quality," Journal of Accounting and Economics, Elsevier, vol. 68(1).

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