Reputational spillovers within audit firm networks – evidence from the Wirecard scandal

This study examines whether reputational damage from a large-scale accounting scandal spills over within international audit firm networks. Prior research mainly studies reputational losses for the national audit firm. We extend this literature by examining whether reputational damage also affects network affiliates in other countries, whether proximity to the scandal matters, and whether affected affiliates respond through reputation repair. Using EY Germany’s involvement in the Wirecard scandal, we find negative stock market reactions for EY clients not only in Germany but also in other European countries. We also document audit market effects: EY Germany loses clients and gains no new listed clients after the scandal, while EY’s other European affiliates face difficulties attracting new clients, especially in countries bordering Germany. Finally, we find evidence consistent with reputation repair among EY’s European affiliates after the scandal. Overall, our findings show that legal independence does not fully shield audit firm network affiliates from cross-border reputational spillovers.