Auditor Reputation and Low-Quality Audits: Evidence from a Structural Model

54 Pages Posted: 20 May 2022 Last revised: 6 May 2025

See all articles by Christopher Koch

Christopher Koch

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management

Sebastian Kronenberger

University of Mannheim; TRR 266 Accounting for Transparency

Aiyong Zhu

Southwestern University of Finance and Economics (SWUFE) - School of Accounting

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

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

Christopher Koch (Contact Author)

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany
+49 (6131) 3929990 (Phone)

HOME PAGE: http://https://www.cg.bwl.uni-mainz.de/

Sebastian Kronenberger

University of Mannheim ( email )

Mannheim, 68161
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Aiyong Zhu

Southwestern University of Finance and Economics (SWUFE) - School of Accounting ( email )

Chengdu
China

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