Does Reputation Discipline Big 4 Audit Firms?
City University of Hong Kong - College of Business
University of Alberta - Department of Accounting, Operations & Information Systems
Wuhan University - School of Economics and Management
Peking University - Guanghua School of Management
January 28, 2011
CAAA Annual Conference 2011
University of Alberta School of Business Research Paper No. 2013-1006
Audit quality is thought to occur primarily due to litigation pressure. We report results from a study conducted in a low litigation environment (China) where a Big 4 audit firm (Deloitte) failed to detect a fraud involving a public company (Kelon). We find that Deloitte’s clients have negative abnormal returns of 4.4% at events pertaining to Kelon, and there is a spillover to clients of other Big 4 audit firms (negative abnormal returns of 1.2%) though these negative market reactions are moderated by strong corporate governance. Deloitte loses clients to local audit firms, and all Big 4 firms lose market share in the IPO market. Our results support a reputation rationale for audit quality, and also show contagion among Big 4 audit firms, and vulnerability of Big 4 firms to loss of clients to non Big 4 firms.
Number of Pages in PDF File: 43
Keywords: auditor reputation, fraud, corporate governance, contagionworking papers series
Date posted: July 4, 2010 ; Last revised: June 12, 2013
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