Accounting firm reputation loss and audit fees: a quasi-natural experiment based on the employee whistleblowing incident

Existing research on the impact of accounting firm reputation loss on audit fees faces interference from audit quality. This study uses Deloitte employee whistleblowing incident in 2021 as a quasi-natural experiment to study the impact of accounting firm reputation loss on audit fees from the perspective of transaction costs, eliminating the endogenous impact of audit quality. The study finds that after the reputation of an accounting firm is damaged, it loses some clients and the average audit fee is decreased. Independent directors with a financial background tend to dismiss accounting firms with reputation loss. Listed companies with higher market relative value bear higher transaction costs; thus, these companies are willing to accept rising audit fees rather than dismissing accounting firms. That is, audit fees depend on the size of transaction costs formed between the accounting firm and auditee. This study controls the endogeneity problem and provides a new perspective of transaction costs for the existing contradictory theoretical and empirical conclusions. Additionally, although existing studies have proposed that the knowledge accumulated by accounting firms and auditees is specific, this study further clarifies it as an asset specificity and studies the game between the two parties from the framework of transaction costs. Reputation is an important mechanism for the market to sanction auditors outside of the law and make them diligent and responsible for high-quality audit reports. However, transaction costs hinder the effect of reputation mechanism. Therefore, companies should hire independent directors with financial backgrounds to eliminate negative effects of transaction costs.