Auditor Credibility Impairment Spillovers: Evidence from Three Andersen Engagements

37 Pages Posted: 23 Dec 2003

See all articles by Rajib Doogar

Rajib Doogar

University of Washington, Bothell

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: June 2007

Abstract

Does bad news about one auditor's conduct affect the credibility of all auditors? We examine auditee abnormal stock returns around twenty-five bad news events involving Arthur Andersen LLP's (Andersen) questionable audits of Waste Management, Sunbeam, and Enron. Of these twenty-five windows, twelve (including eight pre-Enron windows) exhibit significantly negative market-wide mean abnormal returns. Moreover, during these twelve windows, portfolios of low quality auditees are, on average, penalized significantly more than portfolios of high quality auditees. During windows related to SEC actions (probes, sanctions), Andersen, Other Big Five and non-Big Five auditees are strongly penalized. Disclosures about the details of accounting and auditing irregularities, on the other hand, more strongly affect Big Five auditees than non-Big Five auditees. Our study is the first to present systematic evidence that bad news about the conduct of one auditor can generate significant negative externalities (spillovers) to all auditors. Interestingly, all three events that show the strongest evidence of spillovers occur before Enron's financial troubles became public. During Enron-related events, by contrast, evidence for spillovers is mixed for both Andersen and non-Andersen auditees.

Keywords: Auditor Credibility, Spillovers, Agency Costs, Financial Statement Credibility

JEL Classification: G12, L14, L15, M41, M49

Suggested Citation

Doogar, Rajib and Xie, Hong and Sougiannis, Theodore, Auditor Credibility Impairment Spillovers: Evidence from Three Andersen Engagements (June 2007). Available at SSRN: https://ssrn.com/abstract=479941 or http://dx.doi.org/10.2139/ssrn.479941

Rajib Doogar (Contact Author)

University of Washington, Bothell ( email )

18807 Beardslee Boulevard
Box 358584
Bothell, WA 98011-1712
United States
(425) 352-3332 (Phone)

Hong Xie

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

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