In the Spotlight: The Impact of Business Press Coverage on Perceived Big 4 Audit Quality

Abstract

We investigate whether the business press influences equity investors’ perception of
the credibility of the Big 4 for providing high-quality audits. We find that the extent of audit-related
negative business press coverage of a Big 4 is associated with lower earnings response
coefficients (ERC) for clients, negative client abnormal returns on the days of the news release, and
a higher percentage of votes against auditor ratification. Importantly, these results are robust to
controlling for other information sources such as client news, audit quality indicators
(restatements and auditor litigation), and regulator press releases. Also, the extent of Big 4
negative business press coverage is associated with a lower probability of gaining new clients
and a greater probability of client misstatements, suggesting that coverage is diagnostic of audit
quality. The effects for ERCs and abnormal returns are concentrated in clients with low
dedicated institutional ownership and high earnings uncertainty. Overall, this evidence is
consistent with the business press influencing investors’ perception of Big 4 audit quality.

Keywords: Business press coverage; audit quality; Big 4 auditor