Do Shared Auditors Improve Audit Quality? Evidence from Banking Relationships

ABSTRACT Auditor knowledge is a key element in explaining the supply of audit quality, yet understanding of the drivers of this knowledge in the archival literature is limited. This study uses an archival approach to examine whether the sharing of auditors among firms in banking relationships results in information transfers that improve audit quality. I find that audit quality improves for both borrowers and lenders who share the same auditor office. Specifically, lenders who share an auditor office with their borrowers have more accurate loan-loss provisions, especially lenders with smaller commercial loan portfolios. Borrowers who share an auditor office with their lender are less likely to receive a clean audit opinion just prior to bankruptcy. Overall, these findings are consistent with shared auditors in banking relationships developing client specific knowledge that is transferable across clients and industries. JEL Classifications: G21; M41; M42.