Global Audit Firm Networks and Their Reputation Risk

53 Pages Posted: 13 Jan 2009 Last revised: 26 Jun 2016

See all articles by Yoshie Saito

Yoshie Saito

Old Dominion University - College of Business & Public Administration

Fumiko Takeda

University of Tokyo - Department of Technology Management for Innovation

Date Written: January 25, 2014

Abstract

The globalization of audit markets provides an opportunity for the U.S. Big 4 auditors to establish international expertise through global networks, but it also exposes them to reputation risk arising from the acts of their local partners. We analyze the audit failure of ChuoAoyama, one of the Japanese Big 4 audit firms, and find that its credibility impairment reduced security prices of not only the clients of PwC, their U.S. affiliate, but also the American clients of all other Big 4 auditors affiliated with the Japanese Big 4. Because the quality of the U.S. audit firms is perceived as superior to that of auditors in other countries, we also analyze the premiums arising from the affiliation with the U.S.-led global audit firm networks. We compare the effect of Andersen’s audit failure with ChuoAoyama’s in Japanese capital markets, and find that the magnitude of negative market reactions is larger for Andersen’s failure than for ChuoAoyama’s. Together, these results suggest that global audit firm networks have created a network-wide reputation for their services that is susceptible not only to audit failures of the U.S. Big 4, but also to those of non-U.S. affiliates, and that there is a quality premium for the U.S. Big 4 in Japanese markets. Our results provide a rational explanation for PwC’s aggressive efforts to temper the negative impact of ChuoAoyama’s failure on their reputation.

Keywords: international spillovers, event study, assurance value, insurance value

JEL Classification: G14, M40

Suggested Citation

Saito, Yoshie and Takeda, Fumiko, Global Audit Firm Networks and Their Reputation Risk (January 25, 2014). Journal of Accounting, Auditing & Finance 29(3): 203-237, 2014, Available at SSRN: https://ssrn.com/abstract=1326005 or http://dx.doi.org/10.2139/ssrn.1326005

Yoshie Saito

Old Dominion University - College of Business & Public Administration ( email )

Norfolk, VA 23529-0222
United States

Fumiko Takeda (Contact Author)

University of Tokyo - Department of Technology Management for Innovation ( email )

Tokyo
Japan

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