Auditors’ (non)responses to public warnings of audit risk: evidence from short-selling campaigns

Using a novel setting, we examine auditors' responses to public warnings of audit risk and whether their non-responses are associated with auditor and client characteristics. Specifically, we focus on 243 short-selling campaigns from 2006 to 2020 in which short sellers make public, credible allegations of audit-related issues against listed companies. 48.3% of those companies' auditors do not take any observable actions in terms of raising audit fees substantially, terminating the engagement, issuing going concern opinions (GCO), or reporting internal control weaknesses (ICW) in the year after the short sellers' allegations. We further find that longer auditor-client tenure is the factor most consistently associated with auditors' non-response to public warnings of audit risk, a pattern arguably consistent with impaired independence. Additional analyses show that the litigation and reputation costs of auditors' inactions are minimal, further reducing auditors' incentives for responses.