Do Non-audit Service Failures Impair Auditor Reputation? An Analysis of Multiple Scandals Surrounding KPMG Advisory Services in Germany

Non-audit services have become a major focus of the Big Four accounting firms. Failures in these services may impair the accounting firm's reputation as an auditor. Along with short-term reputation effects, this may induce longer-term economic consequences and reactions by the accounting firm to counteract reputation losses. Accordingly, we analyze whether two events of observable non-audit service deficiencies of KPMG Germany impair KPMG's reputation as an auditor in the short run. Considering longer-term consequences, we investigate KPMG's ability to retain and gain clients, audit fees, and indicators of audit quality. With an event study, we find evidence for short-term negative market reactions to the average KPMG client. The follow-up analyses of a broad sample of German listed firms do not suggest that KPMG attracts less or loses more clients nor do we find a difference in their audit fees. However, we find indications of more aggressive earnings management by KPMG clients after the second event. Overall, we present evidence that, in a low-litigation setting, markets punish an audit firm for non-audit service failures in the short run, but longer-term economic consequences seem marginal