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Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients

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  • Jere R. Francis
  • Mihir N. Mehta
  • Wanli Zhao

Abstract

Our study reports evidence on the dynamic effects of client switches on auditor reputations and fee premia. Offices of large accounting firms that lose (gain) major industry clients experience a reputation shock leading to more same†industry client losses (gains) over the next two years. There is also a shift in audit fees charged to other same†industry clients when a major client loss (gain) results in an audit office losing (gaining) city†level industry leadership. A major client loss or gain also creates a short†term capacity shock to an audit office's ability to supply high†quality audits. However, there is no evidence of reputation spillovers to other†industry clients in the audit office, or to clients in other offices of the accounting firm.Les auteurs s'intéressent aux données relatives aux répercussions dynamiques des changements d'auditeur des clients sur la réputation de l'auditeur et sur les majorations d'honoraires. La réputation des bureaux des grands cabinets d'expertise comptable qui perdent (gagnent) d'importants clients d'un secteur d'activité en subit les contrecoups qui se manifestent par la perte (le gain) d'autres clients du même secteur au cours des deux années suivantes. L'on observe également une variation des honoraires d'audit facturés aux autres clients du même secteur lorsque la perte (le gain) d'un client important fait en sorte qu'un bureau de services d'audit perd (gagne) une position de chef de file sectoriel à l'échelon municipal. La perte ou le gain d'un client important a également des répercussions sur la capacité à court terme d'un bureau d'offrir des services d'audit de qualité supérieure. Rien ne permet toutefois de conclure que cette onde de choc sur la réputation se propage aux clients d'autres secteurs d'activité du bureau de services d'audit ou aux clients d'autres bureaux du cabinet d'expertise comptable.

Suggested Citation

  • Jere R. Francis & Mihir N. Mehta & Wanli Zhao, 2017. "Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients," Contemporary Accounting Research, John Wiley & Sons, vol. 34(4), pages 1922-1974, December.
  • Handle: RePEc:wly:coacre:v:34:y:2017:i:4:p:1922-1974
    DOI: 10.1111/1911-3846.12328
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    Cited by:

    1. Francis, Jere R., 2023. "Going big, going small: A perspective on strategies for researching audit quality," The British Accounting Review, Elsevier, vol. 55(2).
    2. Jie Hao & Viet Pham & Meng Guo, 2022. "The Gender Effects of Audit Partners on Audit Outcomes: Evidence of Rule 3211 Adoption," Journal of Business Ethics, Springer, vol. 177(2), pages 275-304, May.
    3. Vlad‐Andrei Porumb & Abe De Jong & Carel Huijgen & Teye Marra & Jan Van Dalen, 2021. "The Effect of Auditor Style on Reporting Quality: Evidence from Germany," Abacus, Accounting Foundation, University of Sydney, vol. 57(1), pages 1-26, March.
    4. Anna Bergman Brown & Nicole M. Heron & Hagit Levy & Emanuel Zur, 2023. "StoneRidge Investment Partners v. Scientific Atlanta: A Test of Auditor Litigation Risk," Journal of Business Ethics, Springer, vol. 187(3), pages 517-538, October.

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