Client-auditor supply chain relationships, audit quality, and audit pricing

Abstract

© 2014, American Accounting Association. All rights reserved. We investigate the association between auditors’ supply chain knowledge and companies’ audit quality and audit pricing. Auditor supply chain knowledge is a specialized understanding of information and processes regarding accounting and auditing issues that relates to both a supplier and its major customer, regardless of industry commonalities, that is particularly useful for understanding complexities associated with the revenue cycle. We find that auditors’ supply chain knowledge at the city level is associated with higher audit quality and lower audit fees, compared to companies employing auditors with supply chain knowledge at the national level or employing auditors without supply chain knowledge. Such effects are stronger for supplier companies that derive a high proportion of revenue from their major customers, and when the revenue cycle for the supplier companies is more important. We obtain these results while controlling for the usual determinants of audit quality and fees, along with auditors’ industry specialization.