Auditor Switches in the Pre- and Post-Enron Eras: Risk or Realignment?

Posted: 3 May 2006 Last revised: 19 Sep 2012

See all articles by Wayne R. Landsman

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Karen K. Nelson

Texas Christian University - Department of Accounting

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Date Written: July 18, 2008

Abstract

Using a comprehensive sample of switches to and from the largest auditors (i.e., the Big N), we examine empirically whether the sensitivity of Big N auditor switches to client risk and misalignment changed between the pre- and post-Enron periods. Although we find an increase in the sensitivity to client misalignment, the sensitivity to client risk generally decreases. The results are consistent with Big N auditors rebalancing their audit client portfolios in response to post-Enron capacity constraints arising from the supply of former Arthur Andersen clients and the audit demands imposed by Sarbanes-Oxley rather than increasing their sensitivity to client risk. Additional evidence indicates that the Sarbanes-Oxley demand shock did not affect Big N auditor switching behavior incremental to the initial Andersen supply shock.

Keywords: Auditor change, audit risk, audit firm portfolios

JEL Classification: M49, L84

Suggested Citation

Landsman, Wayne R. and Nelson, Karen K. and Rountree, Brian Robert, Auditor Switches in the Pre- and Post-Enron Eras: Risk or Realignment? (July 18, 2008). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=899544

Wayne R. Landsman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Karen K. Nelson

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

Brian Robert Rountree

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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