The geographic decentralization of audit firms and audit quality

Audit firms are organized as collections of geographically decentralized offices. Decentralization allows for increased proximity between offices and clients, improving the efficiency of auditors' interactions with client personnel. Yet decentralization also decreases the proximity between offices within each firm, potentially impeding auditors’ interactions with each other. We show that decreased proximity between offices reduces inter-office audit quality “spillovers” and that this effect is driven primarily by reduced monitoring and knowledge sharing. Our findings expand the “within office” view of audit production by demonstrating the importance of interactions between offices and the role of geographic proximity in facilitating them. •Higher audit quality in large Big 4 offices “spills over” to smaller offices.•The spillover is strongly associated with the geographic proximity between the two offices.•The reduced costs of monitoring and knowledge sharing over shorter distances appear to explain this relationship.•The pricing of financial statement risk is an important part of the monitoring explanation.