All Bark and No Bite? Audit Firms' Response to Media Watchdogs

Abstract

We examine how auditors respond to news coverage of peer audit firms and evaluate the extent to which national news outlets function as a watchdog over audit firms. We find that when the news media associates peer audit firms with issues that reflect negatively on audit conduct (i.e., misstatements), other audit firms respond by increasing audit attention (increased fees and reporting delay). Further, we find that this effect is amplified among higher risk clients and that, following negative news coverage of either peer audit firms or their own audit firm, an auditor’s clients are more likely to announce a restatement, receive an adverse internal control opinion (adverse ICO), and receive a higher quality audit. Finally, we find no evidence that firms increase attention following non-negative audit related news coverage. Collectively, our evidence suggests that the news media functions as an effective informal oversight mechanism of audit firms by reporting information that drives increased auditor attention and improved audit quality.

Keywords: Auditor Reputation, Media Coverage, Audit Fees, Big 4

JEL Classification: M41, M42