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

Hikaru Murase

University of Tokyo - Department of Technology Management for Innovation

Shingo Numata

Deloitte Touche Tohmatsu

Fumiko Takeda

University of Tokyo - Department of Technology Management for Innovation

Date Written: August 31, 2011

Abstract

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

Murase, Hikaru and Numata, Shingo and Takeda, Fumiko, Reputation of Low-Quality Big 4 and Non-Big 4 Auditors: Evidence from Auditor Switches of Former ChuoAoyama Clients (August 31, 2011). Journal of Governance and Regulation 2(1): 7-23. Available at SSRN: https://ssrn.com/abstract=1532207 or http://dx.doi.org/10.2139/ssrn.1532207

Hikaru Murase

University of Tokyo - Department of Technology Management for Innovation

Tokyo
Japan

Shingo Numata

Deloitte Touche Tohmatsu ( email )

Paramount Plaza
Midtown Manhattan
New York, NY AB
United States

Fumiko Takeda (Contact Author)

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

Tokyo
Japan

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