AUDIT FIRM REPUTATION, AUDITOR SWITCHES, AND CLIENT STOCK PRICE REACTIONS: THE ANDERSEN EXPERIENCE

Sharad Asthana, Steven Balsam and Jagan Krishnan
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Sharad Asthana: The University of Texas at San Antonio
Steven Balsam: Fox School of Business and Management
Jagan Krishnan: Fox School of Business and Management

No 24, Working Papers from College of Business, University of Texas at San Antonio

Abstract: The financial scandal surrounding the collapse of Enron caused erosion in the reputation of its auditor, Andersen, leading to concerns about Andersen’s ability to continue in existence and ultimately its demise. In this paper we investigate the timing of switch by former Andersen’s clients. We find that the timing of the switch is related to variables hypothesized to be associated with the cost of switch. Specifically these are client size, auditor industry specialization, provision of non-audit services, auditor tenure, quality of earnings and financial distress In addition we find that clients with the greatest market losses attributable to disclosures pertaining to Andersen’s audit of Enron, and strongest corporate governance were more likely to switch early, while those with the strongest ties to Andersen were more likely to delay switching. We also find that clients switching from Andersen experienced positive abnormal returns during the three-day window surrounding the announcement. Importantly we find this positive return to be greater for clients with greater prior losses.

Keywords: Auditor Reputation; Auditor Change; Arthur Andersen; Enron (search for similar items in EconPapers)
JEL-codes: M42 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-11-28
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