Client Acquisition Following an Auditor’s Unethical Behavior: An Examination of Reputational Consequences Following KPMG’s “Steal the Exam” Scandal

Abstract

SYNOPSIS We investigate the reputational effects of KPMG’s scandal involving the improper receipt of confidential regulator data by analyzing KPMG’s acquisition of new audit clients in the post-scandal period. While we find no evidence that KPMG had difficulty gaining clients relative to a broad class of other large auditors, we do find that KPMG’s acquisition rate decreased in the post-scandal period in comparison to other Big 4 audit firms but increased relative to large non-Big 4 auditors. This finding indicates a shift in KPMG’s position in the market for new clients. Our results suggest that a more nuanced examination of auditor reputational damages may help detect distinct effects between classes of audit firms. Importantly, our findings may be of interest to practitioners and researchers as they consider the consequences of a high-profile scandal on an audit firm’s reputation, even if the scandal does not appear to directly impact engagement-level audit quality. Data Availability: Data used in this study are available from public sources identified in the document. JEL Classifications: M42; M48.