Consequences of Auditor Reputation Loss: The Case of Satyam Ltd. and PriceWaterhouseCoopers India

We examine share price effects, auditor switches, audit fee and audit quality changes consequent to the loss of PricewaterhouseCoopers’ (PwC) reputation as an auditor in 2009 following the arrest of two audit partners of its Indian affiliate in charge of the audit of Satyam Ltd., an Indian Information Technology (IT) company. PwC’s non-Satyam clients, especially its IT clients, suffered significant decline in share prices. Almost a quarter of PwC clients in 2009 switched to other auditors the following year. Also, firms that continued to engage PwC as their auditor over the next two years received audit fee discounts but may have suffered a decline in audit quality, relative to other Big 4 clients. Thus, instead of improving audit quality, PwC, India, appeared to have resorted to “low balling” its clients probably to arrest a shrinking market share, and thereby was unable to garner resources to maintain audit quality.