The dark side of close proximity to supply chain partners: Evidence from auditing practices in China

Abstract While close distance to trading partners is often viewed as beneficial to business operations, our study reveals a potential downside. We show that a firm's geographical proximity to its major trading partners is positively correlated with audit fees, which can be explained by an opportunistic narrative: close interactions within the supply chain facilitate misconduct, increasing auditors' engagement risk and concerns. Further analyses suggest that mid‐ and lower‐level employees, rather than top management, are more likely to initiate such misconduct. Overall, our findings highlight the dark side of firm–stakeholder geographical proximity and broaden our understanding of its impact on corporate governance.