The Role of ex-ante Beliefs in Auditor-Client Matches

• In Event: Auditor and Client Reputation

Abstract

In this paper, we emphasize the importance of ex-ante reputation in context of auditor-client matches. Thereby, we understand reputation as the market's belief on whether the auditor is a good fit for the client firm. A good fit is characterized by higher audit efficiency, meaning that the audit effort of an auditor results in higher audit quality. We show that the expected audit quality does not always increase in the auditor's expected fit, as commonly suggested. If litigation does not play a dominant role, auditors with a lower expected fit can deliver higher expected audit quality since their incentives from reputation are stronger. As a consequence, the client does not automatically prefer the perfect audit match. An auditor who is less likely a good fit can render a higher firm value.

Authors

• Elisabeth Plietzsch, University of Graz

• Sebastian Kronenberger, Leibniz University Hanover