The Impact of Customer Firm Data Breaches on the Audit Fees of Their Suppliers

This study investigates how customer firms’ data breaches can affect their suppliers' audit fees within the supply chain relationship. Based on the economic bond that exists through the customer firms’ and supplier firms' supply chains, we examine whether data breach incidents of customer firms are positively associated with their suppliers' audit fees. Consistent with the customer breaches increasing the audit risk to the supplier, we observe a positive association between disclosures of customer firm breaches and audit fees of the supplier. We further find that this association exists for both internal and external data breaches. We conduct two additional tests to provide additional evidence that the supply chain relationship drives our observed association. First, we find that the association varies predictably based on the strength of the underlying supply chain relationship. Second, we find that audit fees are higher when more customers disclose breaches in the supply chain in a given year. Interestingly, we find that while supplier auditors appear to price the risks associated with customer breaches, the breaches do not appear to increase audit delay or affect audit quality. The findings of this study are timely and relevant to academics, practitioners, and regulators