Audit firm reputational consequences of alleged non-accounting misconduct by clients: How bargaining power temporarily shifts around securities litigation

Dain C. Donelson, Matthew S. Ege, Justin Leiby

Research output: Contribution to journalArticle

Abstract

This study examines how auditor-client bargaining power changes when misconduct unrelated to accounting, which we proxy for using non-accounting securities fraud lawsuits, is revealed at another client of the auditor. This type of misconduct can cause perceived reputational damage for the auditor that temporarily increases client bargaining power. In the year after suit filing, fees are lower for clients in the same city-industry office as the sued client, but are unchanged for clients of other auditors in the same city-industry, suggesting the effect is not due to economic distress. This effect is stronger (1) when suits are severe, likely because the negative information is more salient, and (2) when client bargaining power is stronger. Overall, these results provide evidence that reputation is important for U.S. audit firms. Further, the results also support the notion that reputation is susceptible to temporary damage from events beyond auditors’ control.

Original languageEnglish (US)
Pages (from-to)77-100
Number of pages24
JournalAuditing
Volume38
Issue number4
DOIs
StatePublished - Nov 2019

Keywords

  • Audit fees
  • Audit pricing
  • Bargaining power
  • Reputation
  • Securities litigation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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