LAUSR

This paper investigates how auditors respond to shareholder activism against their clients. We find that activism targets pay higher audit fees and also are more likely to receive adverse internal control opinions and first-time going concern opinions. Our results suggest that the increased public scrutiny associated with activism campaigns encourages auditors to increase effort and become more concerned about reputational damage and litigation risk. Consistent with this notion, we find that activism targets are more likely to experience accounting-related lawsuits. In additional tests, we find that the increased likelihood of unfavorable internal control opinions reflects increased auditor diligence (i.e, higher quality reporting) rather than purely reflecting increased auditor conservatism. Overall, the results of this paper identify a number of relationships that should be viewed as important by activists, target firms, and auditors.