Does the Audit Reputation Matter? Individual Auditor Level Evidence
Student thesis: Doctoral Thesis
Related Research Unit(s)
Limited by their research settings and data availability, extant audit firm/office-level studies conclude that the litigation/insurance rationale helps to ensure audit quality, while finding scant support for the importance of the reputation rationale. This study investigates whether reputation matters at the individual auditor level in China, where litigation plays a very limited role and individual auditors’ information is mandatorily disclosed. Specifically, this study investigates whether reputational loss incurred by regulatory sanctions against individual auditors lead to a client loss subsequently. The empirical evidence implies that audit clients are more likely to dismiss individual auditors and their affiliated audit firms after individual auditors’ reputation is impaired. Furthermore, the likelihood of auditor dismissals is significantly positively associated with media coverage of individual sanctions and related frauds. In additional results, I find that the effects of individual auditors’ reputations are more pronounced when clients are in a high media coverage environment, geographically proximate to the sanctioned auditors or located in central positions in a network of interlocked directors. Overall, this study provides a relatively clean test and supports the importance of audit reputation at the individual auditor level.