Audit Office Labor Market Proximity and Audit Quality

Using a unique set of hand-collected data, we examine whether audit office’s proximity to its labor market of universities affects audit quality. We analyze the effect of proximity by the number of universities, and the number of accredited business universities, within a 25-mile radius from an audit office. Our findings suggest that audit offices that are closer to more universities, or to more accredited business universities, are associated with higher audit quality, as observed by a lower likelihood of financial accounting misstatements. Our results are robust across alternative measures of labor market proximity and audit quality, and to a battery of sensitivity tests, including controlling for client firm’s proximity to universities. Overall, our results suggest that it is advantageous for audit offices to be proximate to one of their key labor sources.