Are Auditor Reputations Affected by Private Communication Channels?

ABSTRACT Prior research finds that audit offices lose market share after they are involved in alleged audit failures. We examine whether such reputation effects are driven by private communications from rival auditors. We determine which offices are likely to be well informed about alleged audit failures by identifying the incoming office of the client accused of misreporting and by identifying law firm connections between each audit firm and the plaintiffs and defendants in each lawsuit. Consistent with private communications being a driver of auditor reputation effects, we find that tainted offices lose significantly more market share to rival offices that are likely to be informed about the alleged audit failure. JEL Classifications: M42.