Audit Firm Reputation and Client Stock Returns : Evidence from Envelopegate

“Envelopegate” is a term coined by social media users to describe PwC's non-audit service failure that occurred during the 2017 Academy Awards ceremony, where a PwC partner provided the wrong envelope to the presenter for the “Best Picture” award. For PwC, the error was a regrettable public blunder that resulted in unprecedented negative publicity. However, while prior research documents that audit failures (e.g., restatements, audit scandals) can reduce both audit client market values and auditor market share, it is unclear whether non-audit service failures impact reputations for audit quality in a similar manner. Using client stock returns and changes in PwC's market share, we empirically test whether Envelopegate altered perceptions of PwC's audit quality. We find a significant negative market response for PwC audit clients on the day following Envelopegate and a decrease in PwC's ability to attract new audit clients in a two-year period after the event, suggesting that Envelopegate damaged PwC's reputation for audit quality among two key stakeholders: investors and audit committees. The findings are consistent with Envelopegate having both short-term (client stock returns) and long-term (audit committee engagement decisions) consequences. Additional analyses generally indicate that the damage was inflicted at the firm level, with no indication that the principle results are driven by any specific PwC market region or client industry. Overall, we provide archival evidence that reputations for audit quality are vulnerable to non-audit service failures