Auditor's Technological Proximity Knowledge

We exploit the technological closeness among clients of the same auditor to examine whether auditors accumulate knowledge from their clients’ technological proximity. We find that a client firm’s technological proximity to other clients of its audit office improves audit quality and results in an audit fee discount, even after controlling for the product similarity effect, auditors’ overall technological expertise, and industry specialization. Both an increase in audit quality and a decrease in audit fees occur if a client firm exhibits greater technological similarity to clients of other audit offices within the same audit firm. Our findings suggest that the auditors’ technological proximity knowledge enhances the effectiveness and efficiency of audit work at both the audit firm and audit office levels