Publications:
Bribes and Audit Fees (2025), Journal of Accounting and Public Policy , (with María Gutiérrez Urtiaga and Susana Gago Rodriguez)
We examine how the UK Bribery Act 2010—a law aimed at discouraging corruption—affected auditors’ fees and perceived risks associated with client firms engaging in bribery. Adopting a triple-difference design, we find that those client firms subject to the act and operating in countries perceived as more corrupt pay higher audit fees following the enactment of the act, are more likely to change auditors, and are less likely to be audited by one of the Big 4 auditors. However, we observe no significant changes for subject client firms that operate in low-corruption environments. Moreover, the act has no impact on financial reporting quality across clients. Therefore, we conclude that the increase in audit fees after the passage of the act for client firms operating in high-corruption environments is the response of auditors to the higher potential litigation and reputation costs they face when engaging with clients who are more likely to engage in bribery.
Convergence in Audit Materiality: The Impact of Public Disclosure on Auditors’ Behavior and Quality -(2025), Journal of Accounting and Public Policy , (with Omar de Ines Anton, Beatriz Garcia Osma, Encarna Guillamon Saorin)
Disclosure of audit materiality may facilitate the assessment of auditors' assurance, thereby narrowing the expectation gap. However, disclosure may also induce industry-convergence towards average materiality thresholds, or be exploited by low-quality auditors to justify higher materiality. Using a large sample of UK firms following the materiality disclosure requirement introduced by ISA 700, we predict and find evidence that disclosure triggers industry-convergence in materiality thresholds. This convergence is not accompanied by changes to audit fees, but we document audit quality effects. Industry-converging materiality changes are positively associated with restatements when the firm increases materiality to converge towards the average. In contrasts, materiality convergence appears to worsen audit quality when auditors initial positioning is below industry benchmarks.
The Impact of Non-Accounting Class Action Suits against Audit–Clients on Audit Quality, Forthcoming in the Managerial Auditing Journal (with James Hansen)
This study addresses a gap in the existing literature by examining a frequently overlooked factor: the impact of non-accounting class action lawsuits (NACs) against audit client firms on audit quality. We consider these lawsuits as exogenous shocks that divert auditors' attention toward the sued client, potentially creating spillover effects that affect other, non-sued clients sharing the same audit office. Our findings support this hypothesis, demonstrating that non-sued clients experience a decline in audit quality when their audit office is distracted. This decline is evidenced by an increased likelihood of financial restatements, missed internal control weaknesses, filing delays, and lower audit fees. Furthermore, non-sued clients facing these negative spillovers are more likely to switch auditors in the year following the distraction. Our results remain robust across multiple robustness checks. Overall, this study highlights that legal disputes unrelated to accounting can have significant, unintended consequences, extending beyond the firms directly involved in an NAC and affecting the broader audit environment.
Working Papers:
Political Conflict and Corporate Policies: Evidence from the Basque Country, (with François Derrien, Jose M. Martin-Flores, Arthur Romec)
This paper examines how extortion in the context of a violent politically motivated conflict affects corporate policies. The Spanish Basque Country provides an ideal setting to study this question: the terrorist group ETA extorted local businesses in the regions of Basque Country and Navarre to fund its violent pro-independence terrorist activities. Extortion was exerted within the boundaries of these areas, delimiting the firms that were subject to this risk. Following the end of the extortion in 2011, we find that firms in the affected regions significantly increase their cash holdings and exhibit higher cash flow sensitivity of cash. They also reduce investment in fixed assets, consistent with a shift away from strategic liquidity minimization under extortion risk. Finally, firm performance improves. Overall, the results suggest that politically motivated extortion risk distorts cash management and investment decisions.
Collateral Exit: Client Turnover After a Co-Client's Restatement, (with Mert Erinc)
We examine whether the other clients of an audit office change auditor after one of the office's clients announces that its financial statements can no longer be relied upon, and which of those clients leave. Because clients of one office have different fiscal year-ends, the same announcement falls inside the 90-day reporting window of some clients and outside that of others, which lets us compare non-restating clients of the same office in the same year. A co-client restatement worth 10 percent of the office's audit fees raises the probability that a bystander client changes auditor in the following year by 1.2 percentage points, about 17 percent of the base rate. The departures are dismissals rather than resignations, and the response is of similar size among clients that continue to file with the SEC. The response comes from Item 4.02 non-reliance announcements; co-client restatements disclosed without an 8-K do not predict exit. The bystander's own audit quality, fees, and timeliness do not deteriorate on average. Clients appear to act on what a co-client's failure reveals about the office.
When the Spotlight Burns: Spillover Effects of Negative Media Coverage, (with Mert Erinc)
This study examines whether negative media exposure faced by an audit client generates adverse spillover effects on the audit quality of other clients that share the same auditor. Using a sample of U.S. fraud-related events, we analyze how audit quality varies within audit offices exposed to negative media scrutiny. Employing a robust empirical identification strategy as well as the staggered closure of major newspapers as an exogenous shock to local media exposure, we find that when the accusation date of a targeted client coincides with the audit period of another client, the latter experiences a significant deterioration in audit quality. The effect is concentrated among clients operating in a different industry than the targeted firm, older audit engagements, smaller clients, and firms with lower analyst coverage. Additional tests show that the negative externalities of media scrutiny extend to the audit partners involved. Overall, our findings reveal a previously overlooked externality of media exposure that extends beyond the informal oversight role emphasized in prior literature, with important policy implications for evaluating audit quality and partner–client assignments under capacity and workload constraints.
FRC Quality Inspections and Materiality Judgment, (with Arpine Maghakyan and Omar de Ines Anton)
This study focuses on the effects of FRC audit quality inspections on audit materiality. Using data from listed UK companies between 2013 and 2022, we document a statistically and economically significant negative relation between the FRC inspections and the level of audit materiality for both the audit office and partner level. Indicating that FRC inspections motivate auditors to decrease the materiality levels both for inspected and non-inspected clients after the inspection. These declines in materiality are especially prominent for the auditor's important and risky clients. Even if we see a consistent decline in the level of materiality after the inspections, we do not find consistent changes in the level of the audit fees, audit delays, or misstatements.
Other working papers:
Audit Office's Benefits of Auditing a Reputable Client
This study examines how an unexpected increase in client's reputation alters the audit-client relationship. We use the inclusion to the America's 100 Most Admired Companies' List as a proxy that captures firm's reputation and prestige. We believe that audit offices responsible for delivering the audits of these highly reputable firms should face a positive reputation shock. We find that these audit offices attract more clients and enjoy higher bargaining power evident by the higher audit fees to their other clientele. Further, clients of these audit offices experience positive spill over effects of better quality of audits. Results remain robust to a number of robustness checks.
Effects of the Dark Triad Personality on the Relation between Audit Rotation and Audit Fraud, (with Susana Gago Rodríguez)
In a laboratory experiment, we examine whether the effects of rotation and reputation risks on auditor's honesty depend on personality traits. According to the psychology theory, we hypothesize that the dark triad personality (i.e., psychopathy, Machiavellianism, and Narcissism) influences the perceived rotation and reputation risks and frames auditor's honesty. We show that high dark triad participants report more honestly when they confront high rotation risk. However, there are no significant differences in personalities' response to different reputation risks.