Do Audit Firms Care about Media Coverage? An Investigation of Audit Firm Response to News Coverage

Abstract

We examine how auditors respond to news coverage of their firm and evaluate the extent to which national news outlets function as a watchdog over audit firms. We find that when media coverage includes issues specific to audit conduct (i.e., restatements, adverse internal control opinions, or fraud), audit firms respond by increasing audit attention (increased fees, reporting delay, and late filings). We find this effect is amplified among clients with issues similar to those discussed in the media. Additionally, audit firms respond to high levels of audit related news at peer firms, suggesting firms try to preemptively manage their reputation even when not under direct media scrutiny. Finally, we find no evidence that firms increase attention following non-negative audit related news coverage. Collectively, our evidence suggests that the news media functions as an effective informal oversight mechanism of audit firms by driving increased auditor attention and improved audit quality.