Auditor sanction and reputation damage: Evidence from changes in non-client-company directorships

This study examines whether audit partners who have also served on the boards of directors of companies other than the audit firms' clients lose their directorships after they are sanctioned. Using 2002–2015 Taiwanese samples, the empirical results at the company level show that sanctioned audit partners, particularly those with a serious sanction, are less likely to gain or retain their directorships than the non-sanctioned ones following sanctions. Moreover, the results at the individual level show that, among the audit partners already serving as directors, those who have a serious sanction hold fewer directorships and are more likely to exit the director market than the non-sanctioned ones. Among the audit partners not yet holding director positions, those who have been sanctioned, regardless of the sanction severity, are less likely to enter the director market than the non-sanctioned ones. These contrasting results suggest asymmetric reputation penalties for existing partner directors and potential partner directors following auditor sanctions. Overall, sanctions damage auditors’ reputation capital, and the adverse consequences spill over into the director market.