The Impact of Regulatory Enforcement Actions on Audit Firm Behavior and Market Reputation

Posted: Feb 17, 2021

• Adrian Wells
• Phoebe Parker
• Tucker Jenkins

Abstract

The regulatory landscape for audit firms has undergone significant transformation in recent decades, with enforcement actions serving as critical mechanisms for maintaining market integrity and professional standards. While substantial research exists on the financial consequences of regulatory interventions, there remains a significant gap in understanding how these enforcement actions influence audit firm behavior through reputation channels and market signaling effects. This research addresses this gap by examining the multifaceted relationship between regulatory enforcement and its subsequent impact on both targeted firms and the broader audit market ecosystem. Regulatory enforcement represents a complex communication mechanism that conveys information about professional standards, compliance expectations, and the consequences of audit failures. The signaling theory perspective suggests that enforcement actions serve as public demonstrations of regulatory priorities and tolerance thresholds, thereby influencing market perceptions and competitive dynamics. However, the precise mechanisms through which these signals translate into behavioral changes among audit firms remain inadequately explored. This study posits that enforcement actions create reputation externalities that affect firm behavior beyond direct regulatory penalties.