Do Non-Audit Service Failures Impair Auditor Reputation? An Analysis of the Scandal Surrounding KPMG’s Advisory on the Sale of Frankfurt-Hahn Airport

• In Event: Break and Research & Education Poster Forum

Abstract

Non-audit services have become the main focus of the Big Four accounting firms which has given rise to concerns that audit quality suffers from this shift of focus. Accordingly, the present study analyzes whether the reputation hypothesis as a driver of audit quality also applies to non-audit services, and their effect on audit engagements. Specifically, using a potential non-audit service failure of KPMG in Germany, we investigate whether KPMG audit clients suffered negative short-term abnormal stock returns. This would indicate a reputation effect of the potential failure on KPMG’s audit practice. With an event study, we generally do not find significant abnormal returns. We provide possible explanations as to why the reputation hypothesis might still apply in cases of more severe non-audit service failures. Together with some results from recent literature, our paper shows that a reputational spillover from non-audit service failures to audit practice cannot be empirically confirmed, but that future research is warranted in this area.

Authors

• Christian Friedrich, Darmstadt University of Technology

• Reiner Quick, Darmstadt University of Technology

• Raymond Wolf, Darmstadt University of Technology