Auditor Response to Negative Media Coverage of Client Environmental, Social, and Governance Practices.

• In Event: Auditor and Client Reputation

Abstract

We use new data to examine auditor response to negative media coverage of client environmental, social, and governance (ESG) practices. Although media is not expected to be a primary information source for audit risk judgments, we predict that it generates a different risk for the auditor. Specifically, auditors may anticipate reputation loss spillovers when client reputation is damaged via negative media coverage. We hypothesize that auditors will respond to manage this element of business risk, which has not been examined by prior research. Supporting this prediction, we find that ESG-related negative media coverage of an audit client is associated with a higher likelihood of auditor change and increased audit fees. These results suggest that auditors respond to potential reputation spillovers by avoiding or sharing the burden with the risk-generating client. We also explore whether our results can be attributed to negative media reflecting traditional risk considerations (e.g., risk of material misstatement and financial risk) and do not find support for this explanation. Overall, our results document that auditors incorporate client negative media coverage into their pricing and retention decisions. Our findings suggest that audit firms have reputation and risk concerns beyond those connected to the audited financial statements, which enhances the literature’s understanding of the audit market.

Authors

• Jenna Burke, University of Colorado Denver

• Rani Hoitash, Bentley University

• Udi Hoitash, Northeastern University