Client-Based Measure of the Audit Office Reputation and Its Association with Audit Fees, Earnings Quality, and Client’s Market Value

Posted: 1 Apr 2014

See all articles by Sharad Asthana

Sharad Asthana

University of Texas-San Antonio

Rachana Kalelkar

University of Houston - Victoria

Date Written: March 31, 2014

Abstract

Following the findings from marketing and management literature on corporate reputation, we develop a new proxy to measure the audit office reputation and examine the impact of this measure on audit fees and audit quality. We argue that the presence of reputable clients and their tenure with the audit office is an unbiased and strong testimony for audit office reputation. Following this argument, we use the proximity of clients to the S&P 500 Index and Fortune’s List of Most Admired Companies, weighted by the tenure of the audit office-client relationship, to estimate our client-based audit office reputation measure (CBAR). For a sample of 3,233 audit firm clients we find that our measure of audit office reputation is positively associated with audit fees and audit quality (proxied by absolute discretionary accruals, meet-or-beat-earnings expectations, and restatements). We also show that the earnings of clients from audit offices with higher CBAR are valued higher, suggesting that the market perceives the reputation of such offices to be higher and the earnings of their clients to be more credible. This research is important since CBAR is a new and readily available measure of audit office quality that provides incremental explanatory power for audit fees and audit quality beyond previously available measures.

Keywords: Audit office reputation, client reputation, audit fees, audit quality, market value

JEL Classification: M41

Suggested Citation

Asthana, Sharad and Kalelkar, Rachana, Client-Based Measure of the Audit Office Reputation and Its Association with Audit Fees, Earnings Quality, and Client’s Market Value (March 31, 2014). Available at SSRN: https://ssrn.com/abstract=2418484

Sharad Asthana (Contact Author)

University of Texas-San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

HOME PAGE: http://www.sasthana.com

Rachana Kalelkar

University of Houston - Victoria ( email )

United States

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