An Investigation of the Market’s Perception and Pricing of Auditor Competence: Evidence from PwC’s Oscars Blunder

• In Event: Auditor Choice and Audit Quality

Abstract

On Sunday, February 26, 2017, PwC erred on live television when Brian Cullinan, PwC’s U.S. Board Chairman and Managing Partner of PwC’s Southwest Region handed the wrong envelope for Best Picture to the announcers at the 2017 Academy of Motion Picture Arts and Sciences Awards Ceremony (“the Oscars”). The error was later attributed to a lack of due professional care by Cullinan. We hypothesize that the market recognizes and interprets this event as a signal of PwC’s competence. Consistent with this theory, we find that abnormal returns in the days following the error are significantly lower for PwC clients audited by offices in the Southwest United States relative to other, non-Southwest PwC clients. We document similar results when comparing abnormal returns of Southwest Region, PwC clients vis-à-vis Southwest region clients not audited by PwC. We interpret these results as evidence that stock prices impound investors’ perceptions of the reliability of the financial statements (i.e., the perception of the auditor’s competence). Further, our findings support the Public Company Accounting Oversight Board’s (PCAOB) recent decision to disclose the name of the audit engagement partner.

Authors

• William L Buslepp, Louisiana State University

• Lawrence J Abbott, University of Wisconsin-Milwaukee