An Analysis of Forced Auditor Change: The Case of Former Arthur Andersen Clients

Posted: 3 Oct 2006

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

Abstract

This study examines former Arthur Andersen clients and provides evidence on the factors involved in their selection of new auditors after Andersen's collapse. Using a unique dataset which identifies whether or not former Andersen clients followed their audit team to a new auditor, findings reveal companies with greater agency concerns were more likely to sever ties with their former auditor, whereas those with greater switching costs were more likely to follow their former auditor. We also investigate the effect of the forced auditor change on financial statement quality in an effort to provide insight into the mandatory auditor rotation debate. Using performance-adjusted discretionary accruals as a proxy for reporting quality, our results fail to reveal significant improvements for companies with extreme discretionary accruals that severed ties with Andersen, which is inconsistent with the notion that mandatory rotation improves financial reporting.

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

JEL Classification: M41, M43, M49, G34, D82

Suggested Citation

Blouin, Jennifer and Grein, Barbara Murray and Rountree, Brian Robert, An Analysis of Forced Auditor Change: The Case of Former Arthur Andersen Clients. Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=934413 or http://dx.doi.org/10.2139/ssrn.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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