The Effect of an Audit Firm’s Ethics Scandal on Client Acquisition Practices

Abstract

Auditors who engage in unethical behavior often face subsequent reputational damage, such as loss of market share to competing auditors. KPMG was recently embroiled in a high-profile scandal that involved prominent members of the firm inappropriately receiving confidential information about upcoming PCAOB inspections. This article summarizes a study by Hale and Truelson (2022) that analyzes the effect of the scandal on KPMG’s reputation within the audit marketplace. Specifically, the study examines KPMG’s ability to attract new clients, the types of clients acquired, and audit fees charged to new clients. We then conclude by discussing the implications of the scandal on audit practitioners, regulators, and academics.