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
Date Written: October 18, 2022
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: Suggested Citation