The Consequences of Auditor Reputation Loss: Evidence from Negative Big 4 Business Press Coverage
53 Pages Posted: 28 Jan 2022 Last revised: 29 Apr 2022
Date Written: December 15, 2021
Prior studies use single events or events where auditor culpability is hard to determine to explore the consequences of auditor reputation loss and the findings vary. Using 40 high-profile audit-related negative events involving the Big 4 audit firms from 2008-2017, we find evidence that suggests that clients react negatively to auditor reputation loss. Specifically, auditors experiencing negative events are more likely to lose clients and less likely to gain new clients. Results are most pronounced when clients demand high audit quality, when auditors have high ex ante reputation at stake, and when auditors are subject to significant competition pressure. When considering market responses, we fail to find much evidence of a market response to audit-related negative events using an event-study design, but do find that earnings response coefficients around earnings announcements are lower for clients with auditors that experience audit-related negative events.
Keywords: Big 4 auditor; auditor reputation loss; limits of reputation loss; auditor switch; auditor market share
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