Auditor risk management following audit failure

This study examines the effects of audit failure on Big 4 audit firm monitoring and risk management activities. I use lawsuits and Securities and Exchange Commission actions against auditors to identify serious cases of audit failure and focus my analysis on the audit firm office associated with the event.; My results indicate that auditor response to audit failure has changed over time. Auditors implicated in audit failure events occurring post-Enron appear to enforce more conservative accounting choices in the year following the event. Specifically, clients of these auditors report significantly lower abnormal accounting accruals following the audit failure events relative to other auditors in the same local market. However, I do not find a significant decline in abnormal accounting accruals relative to other auditors' clients following audit failures that occurred prior to 2001. These results are consistent with recent academic research and articles in the financial press which suggest auditors are more concerned with avoiding negative publicity and mitigating increased liability exposure in the post-Enron and Sarbanes-Oxley period.; I do not find evidence that relative to other auditors in the same market, implicated auditors increase fees charged to high-risk clients in the year following the audit failure. If these auditors exert more effort or staff more experienced personnel on riskier engagements in the period after an audit failure, the additional costs do not appear to be passed to the client in the form of higher fees. Finally, my results do not support the hypothesis that auditors reduce the level of litigation risk in their portfolio of clients following audit failures. Overall, my results suggest that auditors implicated in audit failure events temporarily increase their monitoring of client accounting discretion. However, implicated auditors do not appear to significantly alter their other risk management practices following these events.