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Audit Firm Reputation, Auditor Switches, And Client Stock Price Reactions: The Andersen Experience

Author

Listed:
  • 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)

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.

Suggested Citation

  • Sharad Asthana & Steven Balsam & Jagan Krishnan, 2007. "Audit Firm Reputation, Auditor Switches, And Client Stock Price Reactions: The Andersen Experience," Working Papers 0024, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0061acc
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    References listed on IDEAS

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    More about this item

    Keywords

    Auditor Reputation; Auditor Change; Arthur Andersen; Enron;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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