The Ultimate Form of Mandatory Auditor Rotation: The Case of Former Arthur Andersen Clients

36 Pages Posted: 15 Feb 2005

See all articles by Jennifer Blouin

Jennifer Blouin

University of Pennsylvania - Accounting Department

Barbara M. Grein

Drexel University - Department of Accounting and Tax

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Date Written: February 10, 2005

Abstract

The collapse of Arthur Andersen provides a unique quasi-experimental setting to study the implications of mandatory auditor rotation for public firms. Consistent with the extant literature on mandatory auditor rotation, we hypothesize the selection of a new auditor is a function of agency and switching costs. Using a unique dataset identifying whether or not former Andersen clients followed their audit team to a new auditor, we are able to find support for both hypotheses. Further, we find firms with greater performance adjusted discretionary accruals were more likely to follow their Andersen audit team to a new auditor, consistent with these firms trying to mitigate the costs of switching auditors. However, tests of accruals in the subsequent year reveal the most aggressive firms who followed Andersen staff were no longer aggressive in the following year relative to the group who chose new non-Andersen auditors. This is inconsistent with mandatory auditor rotation directly improving financial reporting since we expect the non followers to exhibit the greatest degree of accrual correction. However, our results must be interpreted with caution since the rotation described in the paper is quite atypical. Further, whether the benefits outweigh the costs is still difficult to determine since we cannot empirically quantify these aspects.

Keywords: Mandatory rotation, audit quality, earnings quality, Arthur Andersen

JEL Classification: M41, M43, M44, M49

Suggested Citation

Blouin, Jennifer and Grein, Barbara Murray and Rountree, Brian Robert, The Ultimate Form of Mandatory Auditor Rotation: The Case of Former Arthur Andersen Clients (February 10, 2005). Available at SSRN: https://ssrn.com/abstract=667524

Jennifer Blouin

University of Pennsylvania - Accounting Department ( email )

1315 SHDH
3620 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

Barbara Murray Grein

Drexel University - Department of Accounting and Tax ( email )

Philadelphia, PA 19104
United States

Brian Robert Rountree (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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