Does Client Cyber-Breach Have Reputational Consequences for the Local Audit Office?

We examine whether the public disclosure of a client cyber-breach hurts the reputation of the local engagement office of the incumbent auditor. Prior research suggests that alleged client misconduct (even if unrelated to accounting) can hurt the auditor’s reputation and bargaining position vis-à-vis other clients. By contrast, in a client cyber-breach the client is the victim of misconduct rather than perpetrator of the misconduct (SEC 2018). Consistent with a loss in the perceived value of the audit and a decline in the bargaining position of the incumbent auditor’s local audit office, during 2005-2018 following a client cyber-breach we find a decline in the stock price as well as audit fees for non -breach clients of the local audit office. We contribute to the literature by documenting that the negative effects of a cyber-breach are not limited to the breached client but spillover to the local audit office.