Were Former Andersen Clients Treated More Leniently than Other Clients? Evidence from Going-Concern Modified Audit Opinions

Posted: 28 Aug 2007

See all articles by Jagan Krishnan

Jagan Krishnan

Temple University - Department of Accounting

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Joon S. Yang

Sogang University

Abstract

In the wake of the collapse of Enron and Andersen, several questions were raised about Enron's accounting and the behavior of its auditor. An important question is whether ex-Andersen's clients received more conservative treatment by their new auditors, either due to a greater perceived litigation risk because of their previous association with Andersen, or because of a "correction" of alleged lax auditing by Andersen. We examine going-concern modified audit opinions for former clients of Arthur Andersen, and compare them with opinions issued for other newly acquired clients. We find that auditors were less likely to issue going-concern modified audit opinions to small clients who switched from Andersen than to their existing clients. However, this trend reverses with an increase in client size, with large former Andersen clients more likely to receive going-concern opinions. Our results are consistent with suggestions that increased litigation risk associated with the larger ex-Andersen clients led to increased conservatism by the new auditors. We conjecture that the reduced conservatism for the smaller ex-Andersen clients is likely due to high ex-ante conservatism of the Big 4 in not accepting clients perceived to be risky.

Keywords: Arthur Andersen, Auditor Change, Going-Concern Opinion, Conservatism

JEL Classification: M41, M49 , G33, K22

Suggested Citation

Krishnan, Jagan and Raghunandan, Kannan and Yang, Joon S., Were Former Andersen Clients Treated More Leniently than Other Clients? Evidence from Going-Concern Modified Audit Opinions. Accounting Horizons, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1009235

Jagan Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

Joon S. Yang

Sogang University ( email )

1 Shinsu-dong, Mapo-gu
Seoul 121-742
Korea, Republic of (South Korea)
82-2-705-7852 (Phone)
82-2-705-8519 (Fax)

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