Do non-audit service failures impair auditor reputation? An analysis of KPMG advisory service scandals in Germany

From the Dossier

Entry 14 of 26. Section A: Firm-specific scandals and accountability failures. Back to the Dossier

Summary

This academic study examines whether failures in KPMG’s non-audit advisory work in Germany damaged its reputation as an auditor. Using event study methodology, the authors find that KPMG’s audit clients suffered negative capital market reactions after non-audit service failure events, but KPMG itself did not face significant negative consequences. Earnings-management data give only limited signs that KPMG allows clients more room for opportunistic accounting choices. The authors conclude that “reputation may be insufficient” to restrain Big Four auditors from acting opportunistically at the expense of less powerful parties where the risk of litigation is low.

Source description

A peer-reviewed academic study examining whether failures in KPMG’s non-audit advisory work in Germany damaged its reputation as an auditor, asking, empirically, whether the public and clients actually punish a firm for scandals in one service line by distrusting its work in another. The study tests whether reputational contagion between a firm’s consulting and audit arms is real or assumed.

Credibility assessment

Peer review and academic methodology place this at the highest tier of independence for inductive claims. Under Rule 4, this is a well-designed empirical study testing a specific hypothesis. The finding that reputation does not discipline Big Four firms is particularly significant for the trust-erosion thesis: it suggests market mechanisms fail to correct consulting-industry failures.