Auditors Under Fire : The Association between Audit Errors and the Career Setbacks of Individual Auditors

This paper examines whether and how auditors are disciplined for audit errors. Taking advantage of the long history of auditor identity data from China, we find that signing auditors with client restatements are likely to lose the privilege of signing the audit reports of public clients. However, auditors can avoid this consequence by issuing a relevant modified audit opinion to warn the potential misstatement. Further, auditors are more likely to be disciplined when they are located in a less concentrated audit market. Finally, we find positive outcomes from the disciplinary action of audit firms against auditors. In comparison to non-disciplining firms, disciplining audit firms have a larger decrease in the rate of client restatements, a larger increase in market share, and their clients have a higher earnings response coefficient (ERC) after disciplinary action. In summary, our results suggest that individual auditors in China can face adverse career consequences when they produce poor quality audits