Do Auditors Listen to the Business Press? Negative Media Sentiment and Audit Pricing

• In Event: Auditing and the Business Press & Friends in Media

Abstract

This study investigates the role of the business press in the auditor’s assessment of a client’s business risk. In this study, we argue that negative media sentiment affects audit effort as well as audit pricing by increasing litigation and reputation risk of the auditor, by signaling lower future profitability, and by affecting investors’ perception about the auditor. Using news analytics data from 2004 to 2015, we find that negative media sentiment is positively associated with audit fees, and the association is stronger for press-initiated negative sentiment than for firm-initiated negative sentiment. Additional analyses reveal that the effect of negative media sentiment is stronger for BigN auditors, during assertive market sentiment, and for firms with lower accruals quality, higher probability of default and weaker governance. Results are robust to alternative definitions of sentiment score – abnormal sentiment or sentiment word count, and in audit fee change models.

Authors

• Md Safayat Hossain, Florida International University

• Hasibul Chowdhury, The University of Queensland

• Kartick Gupta, The University of South Australia