Auditors are known by the companies they keep

Jonathan Cook, Zachary T. Kowaleski, Michael Minnis, Andrew Sutherland and Karla M. Zehms

Journal of Accounting and Economics, 2020, vol. 70, issue 1

Abstract: We study the role of reputation in auditor-client matching. Using 1.2 million employment records from US broker-dealers, we find that broker-dealer clients of the same auditor have similar financial adviser misconduct profiles. Our estimates indicate that variation in client misconduct behavior is nearly half as important as variation in client size in explaining matches. Auditors adjust their portfolios when presented with new information about client behavior, and those with the most significant reputation concerns are least likely to deal with high misconduct clients. Finally, we find that an auditor's reputation for accepting high misconduct clients predicts their new clients' future misconduct. Together, our results present new evidence on how reputation affects audit relationships, and the consequences of auditors' reputation concerns for client behavior. Our results also indicate an unintended consequence of audit mandates: non-discerning auditors emerge to serve clients with low endogenous demand for auditing.

Keywords: Auditing; Audit market structure; Broker-dealers; Financial advisers; Financial intermediation; Financial misconduct; Matching; Reputation (search for similar items in EconPapers)
JEL-codes: D14 D18 G24 G28 M21 M41 M42 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:70:y:2020:i:1:s0165410120300161

DOI: 10.1016/j.jacceco.2020.101314

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