TY - JOUR TI - The utilization and effect of information transfer in auditing DO - https://doi.org/doi:10.7282/T3ZC8694 PY - 2018 AB - This dissertation consists of three essays that examine the utilization and effect of information transfer in auditing practice. Specially, I investigate two types of information transfer: information sharing and information diffusion. In information sharing, the information is transferred purposefully to target agents or spread within pre-selected groups. Unlike information sharing, information diffusion occurs when information is created, delivered and propagated by any active nodes within certain groups without purposeful directions. In the first essay, I explore the possibilities of information sharing between audit engagement teams and demonstrate the benefits of doing this, under the assumption that the same audit firm serves multiple clients competing in the same industry. I introduce a number of sharing schemes for utilizing contemporaneous accounting information from peer companies without violating clients’ confidentiality. To satisfy different levels of privacy protection, I propose different sharing schemes by utilizing auditors’ self-generated expectations, and find that auditors can achieve comparable levels of benefits from only sharing self-generated estimation residuals (errors) with that from sharing predicted or actual accounting numbers, both in estimation accuracy and in error detection performance. To satisfy stricter privacy concerns, I also propose a scheme based on sharing categorical information derived from prediction errors. Finally, I use Borda counts to analyze how the choice of the best model changes depending on the cost of errors within different experimental settings. The second essay examines the effect on audit quality of “horizontal” information diffusion among audit clients within geographic industry clusters. I define the geographic industry clusters as the agglomerations of firms from the same industry, located in the same metropolitan statistical area (MSA). Based on a significant negative effect of geographic industry clusters on audit quality, I also investigate the reasons that foster such quality gap. As predicted, the quality difference is more pronounced for firms with stronger local connection measured by the number of local industry competitors sharing the same auditor. In addition, I also find that the geographic industry clusters have a positive effect on audit pricing and the existence of local connection intensifies such impact. Overall, the evidence suggests that due to the lower communication cost in the geographic industry clusters, clients are more likely to learn questionable accounting practices and form alliances to negotiate with auditors and convince them to accept questionable accounting practices. For fear of losing clients, auditors charge clients within the clusters higher audit fees to compensate the raising litigation risks, especially those clients with local connections. The third essay investigates the effect of “vertical” information diffusion between supply chain partners and emphasizes the role of auditors in reducing information asymmetry and sustaining business relationships. I examine the association between auditor reputation of suppliers and the duration of supply chain relationships and find empirical evidence that a poor reputation for the supplier’s auditor increases the likelihood of customer-supplier relationship termination. However, that effect will be mitigated if customers and suppliers are located close to each other or if they share common auditors. Furthermore, suppliers who remediate the problem by switching from low reputation auditors to high reputation auditors will send positive signals to customers, which will decrease the likelihood of a relationship breakdown in the following year. KW - Management KW - Auditing KW - Business logistics LA - eng ER -