Economic Consequences of Auditor Reputation Loss: Evidence from the Audit Inspection Scandal

52 Pages Posted: 2 Nov 2020

See all articles by Francine McKenna

Francine McKenna

American University - Kogod School of Business

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) - Fisher College of Business

Date Written: October 19, 2020

Abstract

We examine whether the 2017 audit inspection scandal affected KPMG’s client relationships and
audit quality. Using the trial transcripts, we construct a novel dataset of KPMG clients whose audit
engagements were compromised by information leakage from the PCAOB (Transcript Sample). We then examine KPMG’s response to this regulatory data theft scandal. Our findings suggest an
increased departure rate following the public revelation of the scandal of clients in the Transcript
Sample but not in the broad portfolio of KPMG clients. While KPMG’s audit fees do not appear
to have changed, we find a reduction of KPMG’s non-audit fees, which is concentrated in the
Transcript Sample clients. Finally, we find that the quality of loan loss provisions of banking clients in the Transcript Sample decreased after the scandal. Overall, our results suggest the audit inspection scandal has imposed costs on both KPMG and its PCAOB-inspected clients whose identities were exposed.

Keywords: KPMG scandal, auditor reputation, auditor turnover, non-audit fees

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

Suggested Citation

McKenna, Francine and Pevzner, Mikhail and Sheneman, Amy and Zach, Tzachi, Economic Consequences of Auditor Reputation Loss: Evidence from the Audit Inspection Scandal (October 19, 2020). Available at SSRN: https://ssrn.com/abstract=3715005 or http://dx.doi.org/10.2139/ssrn.3715005

Francine McKenna

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
3125234188 (Phone)
20015 (Fax)

HOME PAGE: http://https://www.american.edu/kogod/faculty/mckenna.cfm

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) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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