Auditor Reputation Impairments and Private-Client Market Share

• In Event: Audit Markets and Capital Markets

Abstract

We examine the impact of auditor reputation impairments stemming from restatement announcements on their private-client market share to deepen our understanding of how conducting low-quality audits affects auditors’ overall client portfolios. Prior evidence indicates an audit office loses public-client market share following a client of the office announcing a restatement, but it is unclear whether private-client market share behaves similarly. Auditors’ private clients may have less concern about audit quality than public clients because private-client shareholders tend to have lower agency costs and their financial statement users are often creditors that can rely on direct monitoring. We find that the private-client market share of an audit office declines following a restatement of one of its public clients. The decline is caused by losses of the audit office’s current private clients as well as by fewer acquisitions of new private clients in the case of more severe restatements. Further, the decline in private-client market share is larger than the decline in public-client market share, suggesting audit offices cannot simply replace lost public-client revenue with private-client revenue following restatements. Our results have implications for auditors and regulators interested in audit quality incentives.

Authors

• Andrew A. Acito, Virginia Tech

• Jeffrey Pittman, Memorial University of Newfoundland

• Jonathan Truelson, Mississippi State University