Who Bears the Losses From Audit Failures? Evidence From an Individual Reputational Environment
52 Pages Posted: 25 Oct 2015 Last revised: 4 Nov 2019
Date Written: October 1, 2018
While prior studies have explored auditors’ collective reputational losses following audit failures at either the firm or office level when only the audit firm/office identities are publicly available, there is relatively little evidence regarding what happens when individual partner information is public. It is conceivable that failed audit partners will suffer reputational losses due to their involvement in fraudulent reporting, but it is less clear whether non-failed partners in tainted offices will also suffer from reputational damage. Using individual partner identities in China, we first confirm that failed audit partners suffer significant reputational losses in terms of their difficulty to both retain existing clients and attract new clients. The market share of non-failed audit partners in tainted offices generally does not decline but rather increases due to a short-term labor capacity constraint. However, we find that non-failed auditors without past information to infer their capability bear reputational losses in terms of attracting new clients. The results suggest that clients use individual reputation to select auditors and use office reputation as a surrogate to infer quality for partners without a track record. This study provides indirect evidence that the public disclosure of partner names and records could provide potential benefits to audit clients.
Keywords: Audit partner; Audit quality; Auditor reputation; Auditor turnover
JEL Classification: M41, M42, M48
Suggested Citation: Suggested Citation