Audit Failures of Individual Auditors: Reputational Consequences and Learning Effects

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 6: Demand for Audits / Audit Quality

Abstract

This paper examines the consequences of audit failures for individual auditors. Specifically, we examine changes in the auditors’ client portfolios, changes in their career development and their improvements in audit quality after audit failures. We focus on both concurrent auditors and lead auditors responsible for enforcement errors and for type II going concern errors. Our sample includes annual financial statements from 2005 till 2013 for German companies for which details on individual auditors are available. We use a difference-in-differences approach matching individual auditors with audit failures with individual auditors without audit failures by individual auditors’ characteristics. We find that (1) individual auditors do not suffer any client specific consequences, (2) lead auditors following audit failures get less promoted and (3) individual auditors do not learn from prior audit failures. Additionally, we do not find any spillover effects for individual auditors following audit failure and no different results in terms of error severity.

Authors

• Marcin Pawel Bartkowiak, Technical University of Munich

• Benedikt Downar, Technische Universität München

• Juergen Ernstberger, Technische Universitaet Muenchen

• Christopher Koch, Johannes Gutenberg University Mainz