Reputation of Low-Quality Big 4 and Non-Big 4 Auditors: Evidence from Auditor Switches of Former ChuoAoyama Clients
35 Pages Posted: 6 Jan 2010 Last revised: 4 Jun 2013
Date Written: August 31, 2011
We examine how an auditor’s reputation for audit quality affects the selection of new auditors in a unique setting. Specifically, we investigate forced auditor switches after the collapse of ChuoAoyama and its successor, Misuzu, in a low litigation country, Japan, where the insurance value of auditing is minimal. We find that former ChuoAoyama clients with greater reputation concerns tended to switch away from Misuzu, a low-quality Big 4 audit firm. Our results also indicate that auditors’ sensitivity to reputation decreased after the collapse of Misuzu, perhaps because of intensified capacity constraints and decreased differences in perceived audit quality between Big 4 and Non-Big 4 auditors after the audit scandal and the introduction of the J-SOX.
Keywords: auditor switch, agency cost, reputation loss
JEL Classification: M40, G34
Suggested Citation: Suggested Citation