Abstract
We exploit non-accounting related lawsuits against audit client-firms as an exogenous shock that shifts auditors' attention towards the sued client, to test how auditors allocate resources and time and its subsequent effect on audit quality. Adopting this identification strategy, we show that client firms whose offices are situated in a different city as compared to the auditor's office, experience more restatements in the years of the distraction as compared to client firms that have their offices in the same city as the auditor's offices. Results show that only firms situated in a different city experience a decline in their audit quality. Moreover, distracted audit offices are less likely to gain a new client. Results hold after a series of robustness checks.