research
Publications
Auditors and Client Investment Efficiency: A Quasi‑replication and Further Insights from a Regulatory Change with Christopher Bleibtreu, Luciana Orozco and Zhenyang Shi
This study is a quasi-replication and extension of Bae et al. (2017), which examines the relationship between auditors’ characteristics and their audit clients’ investment efficiency. Whereas Bae et al. (2017) use U.S. public firm data, we draw a more general picture by using both public and private firm data from Norway. Overall, the results for Norwegian public and private firms are in line with those Bae et al. (2017) find for public U.S. firms. That is, audit clients invest more efficiently if their auditors have more knowledge and resources, measured by auditor market shares or whether a Big N audit firm performs the audit. Further, an auditor’s influence on its client’s investment efficiency is more pronounced when clients have a higher demand for information, proxied by client complexity. Finally, exploiting a regulatory change in 2011 that allowed small private Norwegian firms to opt out of previously mandatory auditing, we extend the study by Bae et al. (2017). We find that audits can increase investment efficiency for small private firms. Specifically, firms that dismiss their auditors tend to overinvest more than similar firms that are not eligible to opt out of auditing. Further, firms that voluntarily keep their auditor have an overall higher investment efficiency than similar firms that are not audited.
Bleibtreu, C., Erinc, M., Orozco, L., & Shi, Z. (2024). Auditors and client investment efficiency: a quasi-replication and further insights from a regulatory change. Journal of Business Economics, 1-38.
Link to an article on our paper
Working Papers
Auditor-Client Compatibility and Audit Quality with Tzachi Zach (under revision for 3rd round at Contemporary Accounting Research)
We develop a new auditor-client fit metric based on topical compatibility between auditors and their clients by combining the results of PCAOB inspections with clients’ disclosures of their critical accounting policies. We show that auditor fit is negatively related to several traditional audit quality proxies, including restatements, abnormal accruals, and the likelihood of an auditor missing a material weakness in internal controls. Moreover, we report that our new proxy performs better than traditional measures of auditor-client compatibility, such as over twenty versions of industry specialization. We document that auditor fit is positively associated with higher levels of real earnings management, consistent with stronger auditor oversight imposing higher costs on accrual earnings management. Our proxy demonstrates the importance of the results of PCAOB’s inspections, especially when combined with mandatory disclosures about companies’ critical accounting policies.
When the Spotlight Burns: Spillover Effects of Negative Media Coverage with Stavriana Hadjigavriel
This study examines whether negative media exposure faced by an audit client generates adverse spillover effects on the audit quality of other clients that share the same auditor. Using a sample of U.S. fraud-related events, we analyze how audit quality varies within audit offices exposed to negative media scrutiny. Employing a robust empirical identification strategy as well as the staggered closure of major newspapers as an exogenous shock to local media exposure, we find that when the accusation date of a targeted client coincides with the audit period of another client, the latter experiences a significant deterioration in audit quality. The effect is concentrated among clients operating in a different industry than the targeted firm, older audit engagements, smaller clients, and firms with lower analyst coverage. Additional tests show that the negative externalities of media scrutiny extend to the audit partners involved. Overall, our findings reveal a previously overlooked externality of media exposure that extends beyond the informal oversight role emphasized in prior literature, with important policy implications for evaluating audit quality and partner–client assignments under capacity and workload constraints.
Clients’ Financial Misconduct and Their Reactions to Auditors’ PCAOB Inspection Results
This study explores a dilemma that fraudulent companies face when their auditor is found deficient by the PCAOB: to retain or dismiss the deficient auditor. A non-deficient auditor can constrain the client’s ability to manipulate financial statements, whereas a deficient auditor may overlook the issues. On the other hand, a deficient auditor is more scrutinized by the PCAOB and potentially attracts more regulatory attention to its audit engagements. Using a sample of class-action lawsuits and a novel measure tailored to capture the resulting exposure, I find that auditor dismissals are more likely to occur when the auditor’s deficiencies relate to the clients’ misconduct. Additional analyses further suggest that this behavior is attributable to powerful CFOs, and that dismissals help clients to delay litigation. The findings point to some potential unintended consequences of increasing transparency in the audit industry.