Audit Quality and Auditor Reputation: Evidence from Japan

49 Pages Posted: 29 Jul 2012  

Douglas J. Skinner

The University of Chicago - Booth School of Business

Suraj Srinivasan

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2012

Abstract

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.

Keywords: Audit quality, auditor reputation, Japan

Suggested Citation

Skinner, Douglas J. and Srinivasan, Suraj, Audit Quality and Auditor Reputation: Evidence from Japan (July 27, 2012). Accounting Review, Vol. 87, No. 5, September 2012; Harvard PON Working Paper No. 2118825. Available at SSRN: https://ssrn.com/abstract=2118825

Douglas J. Skinner (Contact Author)

The University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

Suraj Srinivasan

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=10700

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