Audit Quality and Auditor Reputation: Evidence from Japan
Douglas J. Skinner
The University of Chicago - Booth School of Business
Harvard Business School
July 27, 2012
Accounting Review, Vol. 87, No. 5, September 2012
Harvard PON Working Paper No. 2118825
We study events surrounding ChuoAoyama’s failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC’s Japanese affiliate and one of Japan’s largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama’s reputation. We use these events to provide evidence on the importance of auditors’ reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama’s clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument.
Number of Pages in PDF File: 49
Keywords: Audit quality, auditor reputation, Japan
Date posted: July 29, 2012
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