Does Auditor Independence Matter? Evidence from SEC Sanctions against PricewaterhouseCoopers LLP for Prohibited Non-Audit Services

We examine stock market effects related to news of the Securities and Exchange Commission’s (SEC) sanctions against PricewaterhouseCoopers LLP (PWC) in 2019. PWC provided prohibited non-audit services (NAS) to audit clients and mischaracterized the nature of the services to the audit committees by telling audit committees the prohibited services were audit services when they were not. The sanctions against PWC provide a rare opportunity to explore whether investors believe that the provision of certain prohibited NAS to audit clients violates an audit firm’s independence, thus reducing investors’ confidence in the audited financial statements. Univariate and Schipper-Thompson (1983) results show that, overall, stock prices for PWC clients reacted significantly negatively to news of the SEC sanctions while prices for non-PWC clients did not. We also find that the reaction is more negative for PWC clients that have higher abnormal fees and smaller audit committees. The examination of earnings response coefficients provides evidence that investors in PWC clients value unexpected earnings less in the quarter after the disclosure of sanctions than in the quarter before suggesting a reduction in investor confidence related to the disclosure of independence violations by PWC.