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.
SYNOPSIS Accounting scholars theorize that audit price is a function of a client's audit and business risk. Existing research finds that the functional expertise of Chief Executive Officers (CEOs) in finance improves financial reporting quality ( Matsunaga, Wang, and Yeung 2013 ), increases profitability, and reduces the likelihood of firm failure ( Custodio and Metzger 2014 ). These factors suggest that auditors' engagement risk decreases when incumbent CEOs possess financial expertise, raising the likelihood that auditors will charge these firms lower fees. In this study, we examine whether CEOs' work experience in accounting- and finance-related jobs affects audit fees. Using a panel of U.S. firms between 2004 and 2013, we find that firms that have a financial expert CEO pay lower audit fees. Our results are robust to various specifications, including firm-fixed effect model and specifications that control for other CEO- and Chief Financial Officer (CFO)-specific and audit committee characteristics. Our findings thus add to the literature on the advantages and disadvantages of a functional background of top managers and how this background can create value for a firm through savings in audit fees.