Are auditors insulated to positive client news? Evidence from audit fees and going‐concern opinions

Abstract This paper investigates if and how auditors consider positive news, related to their clients, when making audit decisions. Using a large sample of US listed companies, we find that auditors charge lower audit fees and are less likely to issue going‐concern opinions when there are a higher number of positive news items related to their clients. Additional analyses show that the influence of positive client news on audit decisions varies with news characteristics, client size, auditor tenure, and auditor size. We also find some evidence that auditors' reactions to positive client news varies with the topic of news, and positive client news has implications for financial reporting quality and accuracy of going‐concern opinions. Collectively, these findings suggest that the media affects auditors' business risk and that auditors are not insulated to positive news.