Auditor Reputation and Low-Quality Audits: Evidence from a Structural Model
54 Pages Posted: 20 May 2022 Last revised: 6 May 2025
Date Written: May 01, 2025
Abstract
This study examines the reputational impact of low-quality audits. Based on an analytical model, we develop an intuition about how low-quality audits affect clients' preferences for an audit firm. Applying demand estimation methods, we provide novel evidence that clients, on average, have lower demand for Big 4 audit firms with a more frequent involvement in low-quality audits. Consistent with theory, we find that the reputational effects are more pronounced for Big 4 audit firms, for non-incumbent audit firms, and in highly competitive environments. Our structural approach allows us to conduct counterfactual analyses, offering initial evidence on audit market effects. Overall, we find that low quality audits have reputational consequences, but that their economic impact remains modest.
Keywords: audit market, auditor demand, restatements, auditor reputation
JEL Classification: M42
Suggested Citation: Suggested Citation
Koch, Christopher and Kronenberger, Sebastian and Zhu, Aiyong, Auditor Reputation and Low-Quality Audits: Evidence from a Structural Model (May 01, 2025). Available at SSRN: https://ssrn.com/abstract=4106448 or http://dx.doi.org/10.2139/ssrn.4106448
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