Essays on the Value of Audit Quality and Auditor Transparency for Clients

The thesis consists of two essays that examine how revealed information on auditors is perceived by their clients and how it affects their auditor appointment choices. The first essay, which is solo-authored, investigates how audit clients involved in financial reporting misconduct react to the regulatory exposure driven by their auditors' PCAOB inspection findings. Using a text-based measure to capture this exposure during the period of misconduct, I explore the degree of exposure avoidance shown by the clients. The findings suggest that, as a salient manifestation of this avoidance, auditor dismissals are more likely to occur in companies whose auditors' deficiencies relate to their own misconduct. The overall inspection performance of the auditor, on the other hand, has a negative impact on dismissals. Combined, these results suggest that clients involved in misconduct are not concerned about their auditors' inferior inspection performance per se, but rather about inspection findings that particularly relate to their own misconduct. Additional analyses further suggest that this behavior is attributable to powerful CFOs, and that dismissals help clients involved in misconduct to avoid litigation, at least temporarily. The findings point to some potential unintended consequences of increasing transparency in the audit industry. The second essay, co-authored with Angela Pettinicchio, investigates if and how much the audit clients value reliable and comparable indicators of audit quality. We contribute to the recent regulatory debate on whether the market for audit services would benefit from the availability of further information on auditors. We propose and employ the PCAOB inspection findings as a strong and reliable proxy for audit quality, and explore how it affects the clients’ choice of external auditors using a discrete choice demand estimation framework. Our results show that a better performance in PCAOB inspections has a positive first-order effect on clients' preferences for auditors. Further, we exploit the framework to get preliminary additional insight on how client-specific determinants influence preferences over audit quality. The results suggest a curvilinear relationship between client size and demand for quality.