Auditors’ hometown ties and audit quality

Abstract

We investigate the relationship between hometown ties among the engagement and review auditors and audit quality by utilizing the data of signing auditors’ hometowns in China during 2007–2019. The results show that hometown ties between the engagement and review auditors are negatively associated with audit quality, as hometown ties can impair peer monitoring and reduce team diversity. Through cross-sectional analyses, we observe that this negative association is mitigated when signing auditors are from Big 10 audit firms, when clients are subject to stronger external supervision, and when signing auditor teams have a higher level of diversity. Besides, the additional analysis indicates that investors perceive the compromised audit quality associated with hometown ties and discount the value of firms. The main result holds in robustness tests and when considering potential endogeneity. Our study adds to the existing literature on audit teams and provides practical and policy insights.