Accepted by Greg Waymire. We thank Greg Waymire (associate editor) and two anonymous referees for detailed and insightful suggestions that have significantly improved the paper. We also thank Paul Caster (discussant), Randy Elder, Murali Jagannathan, Kristian Rydqvist, Ute St. Clair, Steve Wheeler (discussant), and workshop participants at the 2003 American Accounting Association (AAA) Annual Meeting and the 2003 AAA Northeast Regional Meeting for helpful comments.
Auditor Reputation, Auditor Independence, and the Stock-Market Impact of Andersen's Indictment on Its Client Firms*
Article first published online: 15 JAN 2010
2006 Canadian Academic Accounting Association
Contemporary Accounting Research
Volume 23, Issue 2, pages 465–490, Summer 2006
How to Cite
Krishnamurthy, S., Zhou, J. and Zhou, N. (2006), Auditor Reputation, Auditor Independence, and the Stock-Market Impact of Andersen's Indictment on Its Client Firms. Contemporary Accounting Research, 23: 465–490. doi: 10.1506/14P1-5QRR-1NAF-3CE1
- Issue published online: 15 JAN 2010
- Article first published online: 15 JAN 2010
- Audit fee;
- Auditor independence;
- Auditor reputation;
- Nonaudit fee
In this paper, we study a broad sample of Arthur Andersen clients and investigate whether the decline in Andersen's reputation, due to its criminal indictment on March 14, 2002, adversely affected the stock market's perception of its audit quality. Because these reputa-tional concerns are more of an issue if an auditor's independence is impaired, we investigate the relationship between the abnormal market returns for Andersen clients around the time of the indictment announcement and several fee-based measures of auditor independence. Our results suggest that when news about Andersen's indictment was released, the market reacted negatively to Andersen clients. More importantly, we find that the indictment period abnormal return is significantly more negative when the market perceived the auditor's independence to be threatened. We also examine the abnormal returns when firms announced the dismissal of Andersen as an auditor. Consistent with the audit quality explanation, we document that when firms quickly dismissed Andersen, the announcement returns are significantly higher when firms switched to a Big 4 auditor than when they either switched to non-Big 4 auditors or did not announce the identity of the replacement auditor. Our empirical results support the notion that auditor reputation and independence have a material impact on perceived audit quality and the credibility of audited financial statements, and that the market prices this.