The Spillover Effect of Dismissals on Audit Partners’ Current Engagement Fees and Quality

SUMMARY We examine the impact that an auditor dismissal has on the dismissed partners’ current client engagements. We argue that a recent dismissal negatively impacts the audit partner’s bargaining power, reducing the partner’s leverage during negotiations. Consistent with this notion, we document that dismissed partners charge lower audit fees and deliver lower-quality audits to their current clients. This relationship is concentrated for instances when the dismissing client is more economically important to the audit partner. These results are robust to entropy balancing, controls for partner and audit office traits, and a battery of sensitivity tests. Collectively, our study shows that dismissals have a spillover effect on an audit partner’s portfolio of current clients and provides evidence consistent with audit fees and quality declining following a recent dismissal. Data Availability: All data are from public sources identified in the manuscript. JEL Classifications: M42.