Consequences of auditor reputation loss for client firms: deterioration of financial reporting quality after the Andersen collapse

Kevin F. Brown and Li Dang

International Journal of Business Innovation and Research, 2011, vol. 5, issue 3, 318-331

Abstract: This paper examines how Andersen's role in the Enron collapse may have influenced the perceived financial reporting quality of its audit clients. We examine investor response to quarterly earnings announcements by Andersen clients and a sample of matched companies audited by other Big Five auditors. We find that investor response to fourth quarter 2001 earnings announcements for Andersen clients worsened compared to the prior year. In addition, this response to 2001 earnings was more negative for Andersen clients than for clients of other Big Five auditors after the Enron scandal was revealed. Such findings suggest that the loss of auditor reputation was not only a generally stigmatising event for clients, but also specifically undermined confidence in the clients' financial reporting integrity.

Keywords: Arthur Andersen; auditor reputation; perceived reporting quality; ERCs; earnings response coefficients; client firms; financial reporting; quality deterioration; Enron Corporation; energy industry; USA; United States; business scandals; investor responses; quarterly earnings; earnings announcements; Big Five auditors; Ernst & Young; PricewaterhouseCoopers; Deloitte & Touche; KPMG; audits; auditing; reporting integrity; confidence; business innovation; R&D; research and development. (search for similar items in EconPapers)
Date: 2011
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