Does Reputation Discipline Big 4 Audit Firms?

43 Pages Posted: 4 Jul 2010 Last revised: 12 Jun 2013

See all articles by Yanmin Gao

Yanmin Gao

City University of Hong Kong - College of Business

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Qiliang Liu

Wuhan University - School of Economics and Management

Le Luo

School of Management, Huazhong University of Science and Technology

Date Written: January 28, 2011

Abstract

Audit quality is thought to occur primarily due to litigation pressure. We report results from a study conducted in a low litigation environment (China) where a Big 4 audit firm (Deloitte) failed to detect a fraud involving a public company (Kelon). We find that Deloitte’s clients have negative abnormal returns of 4.4% at events pertaining to Kelon, and there is a spillover to clients of other Big 4 audit firms (negative abnormal returns of 1.2%) though these negative market reactions are moderated by strong corporate governance. Deloitte loses clients to local audit firms, and all Big 4 firms lose market share in the IPO market. Our results support a reputation rationale for audit quality, and also show contagion among Big 4 audit firms, and vulnerability of Big 4 firms to loss of clients to non Big 4 firms.

Keywords: auditor reputation, fraud, corporate governance, contagion

Suggested Citation

Gao, Yanmin and Jamal, Karim and Liu, Qiliang and Luo, Le, Does Reputation Discipline Big 4 Audit Firms? (January 28, 2011). CAAA Annual Conference 2011, University of Alberta School of Business Research Paper No. 2013-1006, Available at SSRN: https://ssrn.com/abstract=1633724 or http://dx.doi.org/10.2139/ssrn.1633724

Yanmin Gao

City University of Hong Kong - College of Business ( email )

Hong Kong
Hong Kong

Karim Jamal (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Qiliang Liu

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Le Luo

School of Management, Huazhong University of Science and Technology ( email )

No. 1037, Luoyu Road, Hongshan District
Wuhan, Hubei 430074
China

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