Corporate Governance, Audit Firm Reputation, Auditor Switches, and Client Stock Price Reactions: The Andersen Experience

International Journal of Auditing, 2010

Posted: 4 Feb 2010

See all articles by Sharad Asthana

Sharad Asthana

University of Texas-San Antonio

Steven Balsam

Temple University - Department of Accounting

Jagan Krishnan

Temple University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: February 3, 2010

Abstract

The financial scandal surrounding the collapse of Enron caused erosion in the reputation of its auditor, Arthur Andersen, leading to concerns about Andersen’s ability to continue in existence and ultimately to the firm’s demise. In this paper we investigate the role of corporate governance on the timing of the auditor switch by former Andersen clients. After controlling for factors associated with switching costs, we find clients with strong corporate governance were more likely to switch early. We also find that clients switching from Andersen experienced positive abnormal returns during the three-day window surrounding the announcement of the switch. We attribute this positive response to the reduction in uncertainty associated with the cost of finding a new auditor.

Keywords: Auditor Reputation, Auditor Change, Arthur Andersen, Enron, Corporate Governance

Suggested Citation

Asthana, Sharad and Balsam, Steven and Krishnan, Jagan, Corporate Governance, Audit Firm Reputation, Auditor Switches, and Client Stock Price Reactions: The Andersen Experience (February 3, 2010). International Journal of Auditing, 2010. Available at SSRN: https://ssrn.com/abstract=1547239

Sharad Asthana (Contact Author)

University of Texas-San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

HOME PAGE: http://www.sasthana.com

Steven Balsam

Temple University - Department of Accounting ( email )

306 Speakman Hall
Philadelphia, PA 19122
United States
215-204-5574 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://www.sbm.temple.edu/~drb/

Jagan Krishnan

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

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