Common Auditors in the Supply Chain and the Supplier’s Performance

Abstract

We examine the effect of a common auditor within a supply chain, where the auditor serves both the supplier and its customer(s). This dual role allows auditors to leverage and disseminate crucial chain-specific knowledge. Considering that supplier firms are relatively smaller and at a disadvantage compared with their customers, such supply-chain knowledge is valuable for suppliers to make better demand forecasts and business plans. Consistent with this argument, we find that a supplier sharing a common auditor with its customer(s) has a higher ROA, a higher profit margin, a shorter receivable conversion period, and a smaller demand distortion from the bullwhip effect. Performance enhancement is more pronounced when the common auditor has more opportunities to collect and transfer information and when such information transfer is more valuable to the supplier. Our results are robust to alternative measures of common-auditor presence, alternative explanations, and potential endogeneity concerns. Data Availability: The data that support the findings of this study are openly available. JEL Classifications: D82; D83; L25; M42.