The spillover effects of auditor sanctions on clients: evidence from stock exchange comment letters in China

Abstract

This study investigates the spillover effects of auditor sanctions on client firms. Using the DID model, results of listed Chinese A-share firms for the 2015–2022 period provide evidence of an adverse spillover effects of auditor sanctions where client firms have a higher probability of receiving exchange comment letters that are more severe, indicating that corporate regulators value the reputational damage of auditor sanctions. The spillover effects are more pronounced when auditor sanctions are more severe, news reports of sanction events are higher, or the audit firm is smaller. Additional analyses suggest that such adverse spillover effects are reflected in increased clients’ negative media attention and lower assessment of the quality of client firms’ accounting information. However, client firms’ online information disclosures on regulated, exchange interactive platforms can mitigate such adverse spillover effects. This study expands the boundaries of extant literature on the consequences of auditor sanctions in an emerging market and sheds light on how client firms can cope with the resultant reputation loss.