Audit Quality in the Face of a Crisis: Evidence from the Audit Inspection Scandal

46 Pages Posted: 2 Nov 2020 Last revised: 19 Oct 2022

See all articles by Francine McKenna

Francine McKenna

The Wharton School

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Amy Sheneman

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: October 18, 2022

Abstract

This paper examines the 2017 audit inspection scandal involving the PCAOB and KPMG — one of the few publicized breaches of “tone at the top” at a Big Four firm. With the backdrop of an egregious violation of professional ethics by leaders of KPMG, we study how the scandal affected KPMG and its clients. Using a differences-in-differences approach, we find that audit quality at KPMG increased after the scandal compared to other Big 4 firms. We also find that KPMG was successful in preventing client desertions. Clients most closely tied to the scandal experienced a decline in audit and non-audit fees. Overall, we document operational improvements at KPMG in response to the scandal, along with some possible sacrifices in revenue generation.

Keywords: KPMG scandal, PCAOB, audit quality

JEL Classification: G14, G38, K22, M41, M42, M48

Suggested Citation

McKenna, Francine and Pevzner, Mikhail and Sheneman, Amy and Zach, Tzachi, Audit Quality in the Face of a Crisis: Evidence from the Audit Inspection Scandal (October 18, 2022). Available at SSRN: https://ssrn.com/abstract=3715005 or http://dx.doi.org/10.2139/ssrn.3715005

Francine McKenna

The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

Amy Sheneman (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-4101 (Phone)

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