Preprintgreen2005

After Enron: Auditor Conservatism and Ex-Andersen Clients

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

This study examines whether after Arthur Andersen's demise, successor auditors required more conservative accounting for their ex-Andersen clients in order to minimize litigation risk. We use unadjusted and performance adjusted measures of abnormal accruals, and we examine the level of and changes in the abnormal accruals of ex-Andersen clients in 2002 relative to a control sample of clients that were audited by a Big 4 auditor in 2001 and 2002. We conduct univariate and multivariate tests. In our multivariate tests, we control for other factors that may affect litigation risk cross-sectionally. Our results indicate that the ex-Andersen clients had lower levels of and more negative decreases in abnormal accruals in 2002. This is consistent with auditor conservatism and suggests the successor auditors viewed an Andersen audit as a unique source of litigation risk.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 2012Detecting Earnings Management 1994Earnings management preceding management buyout offers 2008Market Reaction to Events Surrounding the Sarbanes‐Oxley Act of 2002 and Earnings Management 2004Final accounting: ambition, greed, and the fall of Arthur Andersen

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