The impact of customer firm data breaches on the audit fees of their suppliers |
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| Institution: | 1. Case Western Reserve University, Weatherhead School of Management, 10900 Euclid Ave., Cleveland, OH 44106, United States of America;2. Nova Southeastern University, H. Wayne Huizenga School of Business and Entrepreneurship, 3301 College Avenue, Davie, FL 33314, United States of America;3. University of Kansas, School of Business, Capitol Federal Hall, 1654 Naismith Drive, Lawrence, KS 66045, United States of America;1. Faculty of Business Administration, Tohoku Gakuin University, 1-3-1 Tsuchitoi, Aoba, Sendai, Miyagi 980-8511, Japan;2. School of Data Science, Nagoya City University, 1, Kawasumi, Mizuho-cho, Mizuho-ku, Nagoya 467-8601, Japan;1. Rutgers Business School, Rutgers, the State University of New Jersey, Newark, NJ 07102, United States;2. School of Accounting, Southwestern University of Finance and Economics, Sichuan 611130, PR China;3. College of Business, Michigan Technological University, Houghton, MI 49931, United States;4. Rutgers Business School, Rutgers, the State University of New Jersey, Newark, NJ 07102, United States;1. University of Northern Colorado, United States;2. University of Northern Colorado and Monash University, United States and Australia;3. Oregon State University, United States;4. Virginia Commonwealth University, United States;1. Middle Tennessee State University, 1301 East Main Street, Murfreesboro, TN 37132, USA;2. University of South Florida, 4202 E. Fowler Avenue, BSN 3403, Tampa, FL 33620, USA;1. NHH Norwegian School of Economics, Norway, University of Central Florida, United States;2. University of Melbourne, Australia;3. University of Northern Colorado, United States, Monash University, Australia |
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| Abstract: | This study investigates whether audit risks that accompany data breaches of major customer firms can spillover into the supply chain and affect audit fees of their suppliers. Based on the economic bond that exists between supplier firms and their major customers, we predict that data breach incidents of customer firms will lead to higher audit fees for their respective suppliers. Consistent with customer breaches increasing the audit risk to the supplier, we observe a positive association between breach disclosures made by major customers and audit fees of the supplier firm. This association exists for both internal and external data breaches. We further find that audit fees are increasing with the number of major customers disclosing a breach in a given year. Our results are robust to both a matched sample design and a difference-in-difference approach. Interestingly, we find that while supplier auditors appear to price the risks associated with customer breaches, the breaches do not appear to affect audit quality. The findings of this study are timely and relevant to academics, practitioners, and regulators as supply chains continue to become larger and more complex. |
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| Keywords: | Data Breach Supply Chain Relationship Audit Fees |
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