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

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  • Kevin F. Brown
  • Li Dang

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.

Suggested Citation

  • Kevin F. Brown & Li Dang, 2011. "Consequences of auditor reputation loss for client firms: deterioration of financial reporting quality after the Andersen collapse," International Journal of Business Innovation and Research, Inderscience Enterprises Ltd, vol. 5(3), pages 318-331.
    • Handle: RePEc:ids:ijbire:v:5:y:2011:i:3:p:318-331
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