Auditor Reputation: The Impact of Critical Reports Issued by Government Inspectors

Michael Firth

RAND Journal of Economics, 1990, vol. 21, issue 3, 374-387

Abstract: In recent years U.K. Department of Trade investigations into the affairs of a specific company have sometimes been critical of the work done by its auditors and reporting accountants. This article assesses the impact of this criticism on the auditor's reputation. In particular, it examines the stock price performance of the auditor's listed clients. The results show a small wealth loss for the audit clients. The article also examines the impact of the Department of Trade criticism on an audit firm's number of listed clients and its future audit fees. Compared to a control group, the criticized auditors appear to suffer a small loss in market share based on number of listed clients and on audit fees. The evidence suggests that criticized auditors incurred economic losses from the damage to their reputations. This is consistent with models of reputation advanced in the industrial organization literature.

Date: 1990
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