Fool Me Once, Shame on You; Fool Me Twice, Shame on Me: The Long-Term Impact of Arthur Andersen’s Demise on Partners’ Audit Quality

Posted: 10 Mar 2022

See all articles by Feng Guo

Feng Guo

Iowa State University - Department of Accounting and Finance

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Timothy A. Seidel

Brigham Young University

Mi Zhou

Virginia Commonwealth University

Ying Zhou

University of Connecticut - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2022

Abstract

Although recent evidence suggests that individual audit partners explain a substantial portion of the variation in audit quality proxies, much less is known about what determines an audit partner’s quality. Psychology and behavioral economics theories hold that an individual’s experiences can have enduring impacts on subsequent behavior. We examine whether auditors’ direct exposure to Arthur Andersen’s collapse has a long-term impact on the quality of their audits. Our evidence implies that audit partners who directly experienced Andersen’s demise impose stricter monitoring evident in their clients exhibiting a lower propensity for misstatements and small profits, and paying higher audit fees. Importantly, these findings reconcile with research in finance and economics implying that firsthand experiences matter more to subsequent behavior than general economic conditions or second- or thirdhand experiences. Collectively, the results shed light on one facet of how partners’ audit quality evolves over time. Our findings suggest that major failures associated with the audit firm in which an auditor works can ultimately result in these affected individuals later delivering higher audit quality, which should benefit audit committees in partner selection decisions and audit firms in designing partner assignment policies.

Keywords: audit partner performance, Arthur Andersen, audit quality, personal experience

Suggested Citation

Guo, Feng and Lisic, Ling Lei and Pittman, Jeffrey A. and Seidel, Timothy A. and Zhou, Mi and Zhou, Ying, Fool Me Once, Shame on You; Fool Me Twice, Shame on Me: The Long-Term Impact of Arthur Andersen’s Demise on Partners’ Audit Quality (February 24, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4054039

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

3007 Pamplin Hall
Blacksburg, VA 24061
United States

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

Mi Zhou

Virginia Commonwealth University ( email )

301 West Main Street
Richmond, VA 23284
United States

Ying Zhou

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

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