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Information Asymmetry, Verification Costs, and Information Quality: Evidence from the US Audit Market
Kevan L. Jensen, University of Oklahoma
Kevan L. Jensen, University of Oklahoma
Jin Mo Kim, University of Missouri at Kansas City
Han Yi, University of Oklahoma
ABSTRACT. Prior studies assume the engagement office of an audit firm performing an audit is in the same city as the client's headquarters. In reality, about 25% of public-company audits are performed by offices more than 100 kilometers away. We examine this phenomenon to identify factors that motivate managers to consider hiring remote auditors. Using the physical distance between firms and audit engagement offices as a proxy for information asymmetry between firms and their auditors, we examine the associations among information asymmetry, verification costs, and earnings quality. Using individual and simultaneous equation models, we find that firms hiring distant auditors pay higher audit fees, yet have audited earnings that include higher levels of abnormal accruals. This suggests that although information asymmetry is positively priced in verification costs, it continues to inhibit the verification ability of geographically remote monitors, leading to lower quality of verified information.
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