Auditor Switches in the Pre- and Post-Enron Eras: Risk or Realignment?
Posted: 3 May 2006 Last revised: 19 Sep 2012
Date Written: July 18, 2008
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: Suggested Citation