An Examination of the Importance of an Auditor's Reputation.

Abstract Although audit theory stresses the importance of auditor reputation, little empirical attention has been paid to the consequences of a decline in an auditor's reputation. This paper examines the effects of disciplinary actions by the Securities and Exchange Commission (SEC) pertaining to public accounting firms. We find that audit firms involved in disciplinary actions tend to lose market share relative to their competitors. They also have more difficulty retaining clients than other public accounting firms. Finally, affected firms are less able to retain and attract clients in the state mentioned in the SEC enforcement release than they are in the nation as a whole. The results are consistent with the viewpoint that an SEC action and the subsequent decline in an audit firm's reputation will lead to real economic consequences.