The Contagion Reputational Effects of Failed Individual Audit Partners: Evidence from an Audit Client Market

Abstract

SUMMARYPrior research using individual auditor data shows that the stock market punishes the clients of failed auditors but not those of nonfailed auditors in the same tainted office (e.g., Li, Qi, Tian, and Zhang 2017). In this study, using audit client market share, we find similar results, but, more importantly, we document that the nonfailed partners’ client market shares decrease when they lack a track record to infer their audit quality credentials and when they reveal connections through teamwork experience with failed audit partners. In other words, nonfailed auditors in the same tainted office suffer contagion loss if there are no mitigating circumstances, such as a good track record or dissociation with failed auditors. These findings are novel in the literature and contribute to the empirical evidence for contagion effects in an individual partner reputational environment.JEL Classifications: M41; M42; M48