Concern About Information Spillover and Choosing Auditor

Purpose: The auditor's informational oversight of client activities provides auditors with a wealth of information regarding the operations of companies. Many of these pieces of information can carry competitive advantages for companies, making it necessary for auditors to ensure the security of their clients' information. Auditors, acting as carriers of the information, may cause the dissemination of one client's information to another. This transfer of information between different companies by the auditor is referred to as "information spillover". Companies' concerns about information spillover, particularly information that provides a competitive advantage, can have consequences. One likely outcome is that a company may avoid selecting the same auditor chosen by a competitor in the same industry, to prevent the spillover of crucial information between the two companies. This study aims to investigate the impact of companies' concerns about informational spillover on their choice of auditor.
Method: To address the question of whether concern about information spillover affects the choice of the same auditor among companies operating within the same industry, ten industries from the Tehran Stock Exchange, including five innovative industries and five non-innovative industries, were studied over a five-year period from 1396 to 1400. The innovative industries include "Telecommunications," "Information and Communication," "Computers and Related Activities," "Electrical Machinery," and "Pharmaceuticals," while the non-innovative industries include "Transportation and Warehousing," "Tiles and Ceramics," "Metal Products," "Chemicals," and "Cement, Plaster, and Lime". Given that concerns about informational spillover are only justified among companies operating in the same industry, this study considers all possible pairs of companies within each industry and studies their choice of auditor based on their concerns about information spillover. The measurement of companies' concerns about information spillover between each pair of companies was conducted by defining proxies such as research and development costs, innovation, new products, and increases in intangible assets. Then a logistic regression was used to examine the effect of each of these proxies on the choice of the same auditing firm. Finally, to draw conclusions, the results obtained from the various proxies of concern were aggregated into a "concern intensity" proxy to reach a final conclusion and answer the research question.
Findings: The results from the logit regression analysis showed that companies operating in innovative industries avoid selecting the same auditor as other companies in the same industry. This significant negative effect of the concern about information spillover on the choice of the same auditor was observed in other proxies of concern, including new products and increases in intangible assets. However, concern about information spillover, as measured by research and development costs, did not have any significant impact on the choice of the same auditor among companies operating in the same industry. In the end, the aggregated proxy, defined as concern intensity, had a negative significant impact on the choice of the same auditor, indicating that companies concerned about information spillover avoid selecting the same auditor as other companies operating in the same industry.
Conclusion: The findings indicate that companies concerned about information spillover, due to operating in innovative industries, increases in intangible assets, and the introduction of new products, avoid selecting the same auditing firm as other companies operating in that industry. However, the concertn caused by research and development costs, as another indicator of concern about information spillover, did not significantly impact the choice of the same auditor among these companies. Since high level of concern intensity, as the aggregating proxy, leads companies to avoid selecting the same auditor as other companies operating in the same industry, concern about information spillover is introduced as a significant factor in auditor selection. The results of this research can be used in standard-setting and the development of auditing ethical guidelines to improve practices related to maintaining client information security by auditors, thereby reducing the impact of information spillover concerns on auditor selection.