An Investigation of the Market’s Perception and Pricing of Auditor Competence: Evidence from PwC’s Oscars Blunder

Abstract

On Sunday, February 26, 2017, PricewaterhouseCoopers (PwC) erred on live television when Brian Cullinan, PwC’s U.S. Board Chairman and Managing Partner of PwC’s Southwest region, handed the announcers the wrong envelope for Best Picture at the 2017 Academy of Motion Picture Arts and Sciences Awards Ceremony (hereafter, the Oscars). Cullinan’s gaffe represented an egregious lack of competence in a non-audit service (NAS) context. Building on prior brand extension research, we hypothesize that market participants transfer their assessment of Cullinan’s Oscars ceremony incompetence to the financial statement audit competence of PwC’s publicly traded audit clients. Consistent with this, we find that abnormal returns in the days that followed the error are significantly lower for PwC clients in the region Cullinan managed. We interpret these results as evidence that NAS incompetence transfers to perception of the auditor’s auditing competence and that U.S. stock prices reflect this revised perception. Further, our evidence suggests that investors find the disclosure of the audit partner to be informative.