Concern About Information Spillover and Choosing Auditor

Purpose: Auditors, due to their informational oversight of client activities, gain extensive knowledge about companies' operations. Much of this information carries competitive advantages, necessitating robust measures to ensure client confidentiality. However, auditors may inadvertently facilitate the dissemination of a client’s proprietary information to others, a phenomenon referred to as information spillover. This spillover, especially involving competitive information, raises significant concerns for companies. Consequently, firms may avoid selecting the same auditor as their competitors within the same industry to prevent the leakage of sensitive information. This study examines the impact of companies' concerns about information spillover on their auditor selection decisions.
Method: To determine whether concerns about information spillover affect the choice of the same auditor among companies within the same industry, this study analyzed data from ten industries listed on the Tehran Stock Exchange over a five-year period (2017–2021). These industries include five innovative sectors ("Telecommunications," "Information and Communication," "Computers and Related Activities," "Electrical Machinery," and "Pharmaceuticals") and five non-innovative sectors ("Transportation and Warehousing," "Tiles and Ceramics," "Metal Products," "Chemicals," and "Cement, Plaster, and Lime"). Since information spillover concerns are justified only among companies operating in the same industry, all possible pairs of companies within each sector were examined. Proxies for measuring spillover concerns, such as research and development (R&D) costs, innovation, new product introduction, and increases in intangible assets, were defined. A logistic regression model was employed to assess the impact of these proxies on auditor selection. Additionally, a composite "concern intensity" index was created by aggregating the individual proxies to provide a conclusive measure of spillover concerns and their effect on auditor choice.
Findings: The logistic regression results indicate that companies operating in innovative industries avoid selecting the same auditor as their industry peers. This significant negative relationship between information spillover concerns and the choice of the same auditor was also evident in proxies such as new product introduction and increases in intangible assets. However, spillover concerns measured by R&D costs did not significantly influence auditor selection within the same industry. The composite "concern intensity" index showed a significant negative impact on the likelihood of selecting the same auditor, confirming that firms concerned about information spillover are less likely to choose the same auditing firm as other companies in their industry.
Conclusion: The findings reveal that companies concerned about information spillover, especially those operating in innovative industries, introducing new products, or with increased intangible assets, tend to avoid selecting the same auditor as their industry peers. However, concerns related to R&D costs did not exhibit a significant impact on this decision. As the aggregated concern intensity index demonstrates a strong negative effect on auditor selection, information spillover concerns emerge as a significant determinant of auditor choice. The results underscore the importance of enhancing professional auditing standards and ethical guidelines to improve client confidentiality practices, thereby mitigating the influence of spillover concerns on auditor selection.