Auditors’ reputational damage and audit clients’ cost of debt: Evidence from litigation against auditors

Auditing: A Journal of Practice & Theory, 2025[10.2308/AJPT-2021-074]

57 Pages Posted: 1 Aug 2018 Last revised: 6 Apr 2025

See all articles by Wonsuk Ha

Wonsuk Ha

Chung-Ang University - College of Business & Economics

Jong-Hag Choi

Seoul National University - College of Business Administration

Hanna Lee

Public Company Oversight Board

Byron Y. Song

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Date Written: April 01, 2025

Abstract

This study examines how auditors’ reputational damage resulting from litigation affects banks’ assessment of audit clients’ creditworthiness. Focusing on a sample of syndicated loans, we find that banks require higher loan spreads when borrowers’ auditors are sued for alleged audit failures. Further analysis reveals that the results are more pronounced when participating banks perceive greater information asymmetry between themselves and either borrowers or lead banks. These reputational effects last for up to two years following litigation and are incremental to other proxies for the quality of audit outcomes. Collectively, our findings underscore the importance of auditor reputation even in the private debt market, where banks have access to private information about their borrowers. This study contributes to a comprehensive understanding of the costs and externalities of auditor litigation in capital markets.

Keywords: auditor litigation, auditor reputation, cost of debt, syndicated loans

JEL Classification: M41, M42

Suggested Citation

Ha, Wonsuk and Choi, Jong and Lee, Hanna and Song, Byron Y.,
Auditors’ reputational damage and audit clients’ cost of debt: Evidence from litigation against auditors

(April 01, 2025). Auditing: A Journal of Practice & Theory, 2025[10.2308/AJPT-2021-074], Available at SSRN: https://ssrn.com/abstract=3223582 or http://dx.doi.org/10.2308/AJPT-2021-074

Wonsuk Ha

Chung-Ang University - College of Business & Economics ( email )

84 Heukseok-Ro, Dongjak-gu
Seoul
Korea, Republic of (South Korea)

Jong Choi

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Hanna Lee

Public Company Oversight Board ( email )

Byron Y. Song (Contact Author)

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

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