The Geography of REIT Investment in Audit Services

We examine the geographic component of investment in audit services in the REIT industry. As REIT firms have strong incentive for information transparency and maintain high audit quality, we expect that geographic distance, as a proxy for information flow, among REIT firms, their auditor, and the Securities and Exchange Commission (SEC) offices have effects on the audit and non-audit fees paid by REIT firms. We find that: 1) REIT firms pay more audit and non-audit fees to their auditor when their headquarters are located closer to the SEC offices; 2) REIT firms pay higher audit and non-audit fees when the office of their auditor is closer to the SEC, 3) REIT firms pay higher audit and non-audit fees when the office of their auditor is located closer to their headquarters, and 4) REIT firms that are close to both the SEC and their auditor pay the highest fees for both audit and non-audit services. The results are consistent with our expectation that REIT firms desire high quality audit services and are willing to pay higher fees for them. Also, the REIT industry may enjoy the knowledge spillovers between the audit and non-audit sides and the industry specialization of their auditor.