Who Bears the Losses From Audit Failures? Evidence From an Individual Reputational Environment

52 Pages Posted: 25 Oct 2015 Last revised: 4 Nov 2019

See all articles by Ferdinand A. Gul

Ferdinand A. Gul

Deakin University - Department of Accounting

Chee Yeow Lim

Singapore Management University - School of Accountancy

Kun Wang

Tsinghua University

Yanping Xu

Jinan University

Date Written: October 1, 2018

Abstract

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

Gul, Ferdinand A. and Lim, Chee Yeow and Wang, Kun and Xu, Yanping, Who Bears the Losses From Audit Failures? Evidence From an Individual Reputational Environment (October 1, 2018). Available at SSRN: https://ssrn.com/abstract=2679310 or http://dx.doi.org/10.2139/ssrn.2679310

Ferdinand A. Gul

Deakin University - Department of Accounting ( email )

Melbourne
Australia

Chee Yeow Lim (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Kun Wang

Tsinghua University ( email )

Beijing, 100084
China

Yanping Xu

Jinan University ( email )

Guangzhou, Guangdong 510632
China

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