Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients

64 Pages Posted: 2 Jun 2016 Last revised: 18 Jun 2017

See all articles by Jere R. Francis

Jere R. Francis

Maastricht University

Mihir N. Mehta

University of Michigan at Ann Arbor

Wanli Zhao

Renmin University of China

Date Written: June 10, 2017

Abstract

Our study reports evidence on the dynamic effects of client switches on auditor reputations and fee premia. Offices of large accounting firms that lose (gain) major industry clients experience a reputation shock leading to more same-industry client losses (gains) over the next two years. There is also a shift in audit fees charged to other same-industry clients when a major client loss (gain) results in an audit office losing (gaining) city-level industry leadership. A major client loss or gain also creates a short-term capacity shock to an audit office’s ability to supply high-quality audits. However, there is no evidence of reputation spillovers to other-industry clients in the audit office, or to clients in other offices of the accounting firm.

Keywords: Auditor Reputation; Auditor Changes; Audit Fees; Earnings Quality

JEL Classification: D40, L11, M20, M40

Suggested Citation

Francis, Jere R. and Mehta, Mihir N. and Zhao, Wanli, Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients (June 10, 2017). Contemporary Accounting Research, Forthcoming; Ross School of Business Paper No. 1317. Available at SSRN: https://ssrn.com/abstract=2787269 or http://dx.doi.org/10.2139/ssrn.2787269

Jere R. Francis (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Mihir N. Mehta

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Wanli Zhao

Renmin University of China ( email )

59 Zhongguancun Street
Beijing, 100872
China

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