Prior research finds that audit offices lose market share after they are involved in alleged audit failures. We examine whether such reputation effects are driven by private communications from rival auditors. We determine which offices are likely to be well informed about alleged audit failures by identifying the incoming office of the client accused of misreporting and by identifying law firm connections between each audit firm and the plaintiffs and defendants in each lawsuit. Consistent with private communications being a driver of auditor reputation effects, we find that tainted offices lose significantly more market share to rival offices that are likely to be informed about the alleged audit failure.

We exploit the technological closeness among clients of the same auditor to examine whether auditors accumulate knowledge from their clients’ technological proximity. We find that a client firm’s technological proximity to other clients of its audit office improves audit quality and results in an audit fee discount, even after controlling for the product similarity effect, auditors’ overall technological expertise, and industry specialization. Both an increase in audit quality and a decrease in audit fees occur if a client firm exhibits greater technological similarity to clients of other audit offices within the same audit firm. Our findings suggest that the auditors’ technological proximity knowledge enhances the effectiveness and efficiency of audit work at both the audit firm and audit office levels. Data Availability: Data are available from the public sources cited in the text.