Do failed auditors receive lower audit fees from continuing engagements?

Abstract

This study investigates whether a failed auditor suffers from reduced audit fees from clients who continue to employ him and whether the reduced audit fees are more pronounced when the failed auditor is not a market leader. The subject audit firm Deloitte Touche Tohmatsu (Deloitte), Hong Kong, issued a clean audit opinion to a client on its 1997 financial statements which were subsequently found to have accounting errors because of fraud and other irregularities by KPMG. Consequently, Deloitte resigned from the engagement and withdrew its audit report for the client. Results show that Deloitte had more negative change in audit fees than other auditors after the event, and the reduced audit fees were more pronounced when Deloitte was not the market leader. Additional tests suggest that Deloitte did not reduce its audit quality after the event.