Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG’s Audit Practice?

Auditing: A Journal of Practice & Theory (February 2019), 38(1): 77-102.

Posted: 1 Apr 2019

See all articles by Matthew Baugh

Matthew Baugh

Arizona State University (ASU) - School of Accountancy

Jeff P. Boone

University of Texas at San Antonio - Department of Accounting

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

K. K. Raman

The University of Texas at San Antonio

Date Written: March 13, 2019

Abstract

We examine the consequences of misconduct in a Big 4 firm’s nonaudit practice for its audit practice. Specifically, we examine whether KPMG’s audit practice suffered a loss of audit fees and clients and/or a decline in factual audit quality following the 2005 deferred prosecution agreement (DPA) with the Department of Justice for marketing questionable tax shelters. We find little evidence that the DPA adversely impacted KPMG’s audit practice by way of either audit fees or the likelihood of client gains/losses, suggesting little or no harm to KPMG’s audit reputation. We also find that the DPA had no effect on the firm’s factual audit quality, even for those audit clients that dropped KPMG as their tax service provider. Collectively, our findings suggest that there was no spillover effect from the DPA to KPMG’s audit practice.

Keywords: DOJ/KPMG deferred prosecution agreement; reputational loss; audit fees; client gains/losses; audit quality; Big 4 firms

JEL Classification: M4, M49

Suggested Citation

Baugh, Matthew and Boone, Jeff P. and Khurana, Inder and Raman, K. K., Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG’s Audit Practice? (March 13, 2019). Auditing: A Journal of Practice & Theory (February 2019), 38(1): 77-102.. Available at SSRN: https://ssrn.com/abstract=3352020

Matthew Baugh

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Jeff P. Boone

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

K. K. Raman (Contact Author)

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

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