An Examination of Auditor Choice Using Evidence from Andersen's Demise

International Journal of Auditing, Vol. 12, Issue 2, pp. 89-110, July 2008

22 Pages Posted: 14 Jul 2008

See all articles by Kathryn Bewley

Kathryn Bewley

Ryerson University - Ted Rogers School of Management

Janne Chung

York University - Schulich School of Business

Susan A. McCracken

McMaster University - Michael G. DeGroote School of Business

Abstract

The Enron/Andersen scandal provides a unique opportunity to examine the role of signaling in auditor choice. Not surprisingly, many clients dismissed Andersen quickly after Enron declared bankruptcy in some cases even before a replacement auditor was engaged and lawsuits against the audit firm were mounted. However, many clients did not dismiss Andersen until its auditing practice was shut down by the court. This study investigates why some clients did not make a quick auditor switch, that is: was the timing of the switch a signal? Our predictions are based on the theory that those that switched early (compared to those that switched late) were sending a signal that they were high-quality financial reporters. We test a sample of 711 companies from the final portfolio of Andersen auditees. Consistent with our hypotheses, we find that subsequent to the change of auditors, management of those companies that dismissed earlier was more likely to initiate the restatement of their financial statements than those that dismissed later. It appears as though the early switchers were attempting to distance themselves from Andersen and the financial reporting used with Andersen. In contrast, those clients that dismissed Andersen later had more restatements imposed on them than those that dismissed earlier, suggesting that their financial statements were of lower quality.

Suggested Citation

Bewley, Kathryn and Chung, Janne and McCracken, Susan A., An Examination of Auditor Choice Using Evidence from Andersen's Demise. International Journal of Auditing, Vol. 12, Issue 2, pp. 89-110, July 2008, Available at SSRN: https://ssrn.com/abstract=1158743 or http://dx.doi.org/10.1111/j.1099-1123.2008.00373.x

Kathryn Bewley (Contact Author)

Ryerson University - Ted Rogers School of Management ( email )

Toronto, Ontario
Canada
416 979 5000 x2487 (Phone)

Janne Chung

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Susan A. McCracken

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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