How Sanctioned Auditor Labor Market Consequences Impact Colleague Audit Quality

UC-Carl H. Lindner College of Business 

We examine how PCAOB enforcement actions against individual auditors
influence the audit quality of non-sanctioned auditors within the same office, conditional on
whether sanctioned auditors depart or remain with their firm. Using a difference-in-differences
(DID) design, we find that audit quality improves when sanctioned auditors depart but deteriorates
when they remain. To address concerns about endogeneity and biases in staggered DID designs,
we conduct several robustness tests that confirm our main findings. Additional analyses reveal that
audit quality improvements (deteriorations) are mainly driven by large (small) audit firms and are
more pronounced when the sanctioned auditor faces a longer suspension, is more senior, or is
sanctioned for audit quality (non-audit quality) issues. Our findings provide novel evidence that
the labor market consequences of sanctioned auditors result in differential spillover effects on their
colleagues' audit quality. These results offer timely insights amid the PCAOB's increasing
emphasis on individual accountability.