Research On The Economic Sconsequences Of The Damage Of Audit Firm’s Reputation

Certified Public Accountant(CPA)known as the “economic police officer”,is an important task of the annual audit report.The audit reports provides the identification function for the listed company’s annual report,thus the reliability of the financial statements is strengthened.The specificity of the audit and the closure of the auditing environment make it impossible for most non-accounting people to directly observe the quality of an audit.Because of this factor,the reputation of the CPA firm,serving as a source of reference,becomes an important measurement to the firm’s audit quality.Investors tend to choose firm with brand or good reputation.However the credibility of audit reports provided by CPA firms have recently been questioned by investors because of a series of scandals which occured between big corporations and accounting firms.In that cases the bad reputation led to certain economic consequences,which were reflected by loss of customers,loss of staff and decline of audit revenue.We take the case from Reanda certified public accountants(Reanda CPAs)as a starting point,to use different analysis methods for studying the influence of share price of the companies which are caused by Reanda CPA reputation damage.By applying statistic methods,we discover the abnormal stock price fluctuations which are caused by the announcement of Reanda CPA audit failure.We further show that due to the influence of damaged reputation,firms undergo a decline in customer quality and have more audit failure based on the use of financial risk analysis of damaged reputation.In addition,we calculate the loss of human resources and the loss of clients after the punishment of the firms in order to reveal the negative impact of the reputation loss of accounting firms.The result shows that the negative reputation causes the massive loss of both human resources and customers,and the significant decrease of the capability to accept new customers.We also examine the impact of repetitional damage on the market share and audit fees of accounting firms to find out whether the audit market has punished reputation damage.We find out that after penalty announcements of the damaged reputation are released,its market share will be significantly reduced.They lose the competition with other accounting firm with the same scale.It further proves the damaged reputation of certified public accountants causes serious economic consequences.Based on the case of Reanda CPA,the lesson is that building a good reputation of an accounting firm can not be accomplished in short term.However it is very easy to damage reputation quickly.One audit failure could cause the complete loss of customers.From the perspective of economic consequences caused by the damaged reputation,we recommend the following: firstly,as a public accounting firm,the company should strictly carry out audit procedures and make the best use of its capacities.It should be cautious when choosing audit clients with higher earnings management.When necessary it should choose to resign in order to protect its own reputation;secondly,as a regulatory agency,the CSRC should increase the penalties for failure of auditing and increase the cost of “crime”,thus to eliminate the root causes of such occurrence.The China institute of certified public accountants(CPAS)has stepped up its supervision,giving the firm more deterrence and restoring investors’ confidence in the audit market.